What is the relationship between firm size and cost efficiency according to economies of scale?

The correct answer emphasizes the concept of economies of scale, which refers to the advantages that larger firms experience as they increase their production. As firms grow in size, they can spread their fixed costs—such as administrative expenses, research and development, and capital investments—over a larger output. This results in a reduction of the average cost per unit produced, leading to greater cost efficiency. Additionally, larger firms may have access to better technology, bulk purchasing of materials, and a more specialized workforce, all of which contribute to lowering production costs.

The notion that firms need to grow in size to minimize their production costs aligns with the economic principle that larger scale operations can achieve more efficient production methods and capitalize on the benefits of per-unit cost reductions, thus reinforcing the importance of firm size in maintaining competitive advantage in many markets.