Question

Suppose that a car manufacturer discovers that it can lower its average costs if it diversifies its operation by also producing pickup trucks and SUVs.What concept does this illustrate

Answer 1

Answer: Economies of scale

Explanation:

Economies of scale occurs when there is a reduction in cost as a result of an increase in production. Economies of scale are the cost advantages which a business can exploit through the expansion of its scale of production. The aim of economies of scale is to lower the average costs of production.

When the car manufacturer diversifies his operation by producing pickup trucks and SUVs, there'll be a reduction in the average unit cost of output. This term refers to Economies of scale.

Answer 2

Answer:

A company can lower its average costs if it diversifies its operation based on the concept of Economies of Scale.

Explanation:

Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable.

In this case, a car manufacturer that diversifies its operation to also produce pick up trucks and SUVs will spread the cost of production and produce more at a cheaper rate.

Spreading internal function costs across more units produced and sold helps to reduce costs.

Specialization of labor and more integrated technology boost production volumes.

This is a clear application of economies of scale.