What do we call the reduction in average costs as production output increases?

The term for the reduction in average costs as production output increases is economies of scale. As a firm increases its production, it is often able to spread its fixed costs—such as administrative expenses, rent, and machinery—over a larger number of units. Additionally, larger production volumes can lead to more efficient use of resources, bulk purchasing of materials, and specialization of labor, all contributing to lower average costs.

Economies of scale reflect the benefits that arise when a company grows in size and output, making its operations more efficient. This phenomenon is crucial in the production process, as it can provide competitive advantages, allowing firms to offer lower prices or achieve higher profit margins.

In contrast, diminishing returns to scale would indicate that increasing production leads to less efficient use of resources, which is the opposite of what occurs in economies of scale. Diseconomies of scale refers to the situation where average costs begin to rise as output increases due to factors such as management inefficiencies or overextended resources. Constant returns to scale suggest that costs remain the same as production increases, which does not describe a reduction in average costs as output rises.