IGCSE Economics Practice Test

When a company doubles its inputs but experiences less than a doubling of its outputs, it exemplifies the concept of diminishing returns to scale. This term indicates that as a firm increases its inputs proportionately, the increase in output is less than proportional. This phenomenon can occur due to various factors, such as inefficiencies arising in the production process or coordination challenges as more resources are added.

In contrast, economies of scale refer to the reductions in per-unit costs as a firm increases its level of production, which typically leads to output increasing at a greater rate than input. Financial economies of scale relate specifically to cost advantages that large firms can achieve due to their size in areas like financing. Technical economies pertain to efficiencies gained through advanced technology that reduces costs or enhances output. Diminishing returns to scale specifically addresses the scenario where inputs are increased but result in a proportionally lesser increase in output, making it the appropriate term for the described situation.