A statewide alliance of independent hospitals has formed in order to do group purchasing of medical supplies. Group purchasing allows the hospital alliance to negotiate lower prices with suppliers because of the large number of materials ordered. This is an example of the advantage of __________ resulting from an alliance.
a. explicit collusion.
b. distribution opportunities.
c. economies of scale.
d. opportunistic behavior.

The situation in which a company reduces its production expenses by expanding is called economy of scale. It is a situation in which the more it occurs, the cost that the company has to manufacture a product is lower.

There is a greater benefit for every extra unit we produce. This reduction in the cost of unit manufacturing is not reduced because the price of raw materials goes down, but to take advantage of a material that we have already bought and in which we invested money in the past.

Therefore, it occurs especially in situations in which the company buys more facilities. If we buy a machinery, the way to take advantage of it is to produce more since it is the way that we get a greater benefit, by taking advantage of the same machinery to produce more products, the unit cost of each product is lower. And we will get more benefit the more we produce. This benefit will be greater since we will not have to increase manufacturing costs since we have already had it before.