Which of the following is a reason why a firm needs to grow?

• A. To achieve economies of scale and reduce average costs
• B. To increase the price elasticity of demand for its product
• C. To decrease its market share
• D. To avoid specialization of labor

Answer: (A)

Verified step by step guidance

1. Understand the concept of economies of scale: Economies of scale occur when a firm's average costs decrease as its output increases. This happens because fixed costs are spread over more units and operational efficiencies improve.
2. Recognize why firms want to reduce average costs: Lower average costs allow a firm to be more competitive by either lowering prices or increasing profit margins, which is a strong incentive for growth.
3. Analyze the other options: Increasing price elasticity of demand means consumers become more sensitive to price changes, which is generally not a goal for firms seeking growth. Decreasing market share is counterproductive since firms usually aim to increase it. Avoiding specialization of labor is not typically a reason to grow; specialization often improves efficiency.
4. Conclude that the primary reason a firm needs to grow is to achieve economies of scale, which leads to reduced average costs and improved competitiveness.
5. Summarize that growth enables firms to spread fixed costs, improve production techniques, and ultimately lower the cost per unit, which is essential for long-term success.