What do economies of scale refer to?

Economies of scale refer to the cost advantages that a business can achieve as it increases its level of production. When a company expands its operations, it often reduces the average cost per unit due to the spreading of fixed costs over a larger number of goods or services produced. This overarching concept rests on the principle that larger quantities of output can result in lower costs through various mechanisms such as bulk purchasing of materials, more efficient production techniques, and enhanced bargaining power with suppliers.

In contrast, other options describe different aspects that do not align with the definition of economies of scale. For instance, high operational costs due to inefficiencies would indicate the presence of diseconomies of scale, which occur when a company grows so large that the costs per unit start to rise. The decrease in the customer base during growth phases is not a concept associated with economies of scale; instead, it would indicate market challenges unrelated to production efficiency. Lastly, fixed costs becoming variable as production increases does not correctly characterize economies of scale, as it is the efficient distribution of fixed costs over more units that contributes to their reduction, rather than a transformation of cost types.