What typically happens as a firm experiences economies of scale?

As a firm experiences economies of scale, its average costs decrease. This phenomenon occurs because, as production increases, the firm can spread fixed costs over a larger number of units. Additionally, larger firms often have access to more efficient production techniques, bulk buying discounts for materials, and better negotiation power with suppliers, all contributing to reduced costs per unit.

The declining average costs can lead to a more competitive pricing strategy, which can further enhance the firm’s market position. This is a significant advantage, especially in industries where competition is based on pricing.

In contrast, options suggesting rising production costs or declining market demand do not align with the concept of economies of scale. Economies of scale are fundamentally about cost efficiency and competitive advantage, making the reduction in average costs a crucial aspect of this economic phenomenon. Quality concerns may vary based on other factors but are not a direct outcome of economies of scale. Thus, the correlation between increased production and lowered average costs is the fundamental reason for selecting this answer.