Economies of Scale

Economies of Scale

The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.

There are two types of economies of scale:

External economies - The cost per unit depends on the size of the industry, not the firm.

Internal economies - The cost per unit depends on size of the individual firm.

Notes:

Economies of scale gives large companies access to a larger market by allowing them to operate with greater geographical reach. But for the more traditional (small to medium) companies, size does have its limits, so after a point an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale".

See also: Classical Economics, Diseconomies of Scale, Dismal Science, Economic Profit, Economics, Economies of Scope, Economic Value Added - EVA, Ramp Up

---

Economies of scale

Achievement of lower average cost per unit through increased production.

---

Economies of scale

The decrease in the marginal cost of production as a firm's extent of operations expands.