Economies of Scale

Economies of scale

Achievement of lower average cost per unit through increased production.

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Economies of scale

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

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Economies of Scale

What Does Economies of Scale Mean?

The increase in the 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 by increasing output, which spreads fixed costs over an increased number of goods produced. There are two types of economies of scale: (1) External economies—the cost per unit depends on the size of the industry, not that of the firm; and (2) Internal economies—the cost per unit depends on the size of the individual firm.

Investopedia explains Economies of Scale

Economies of scale give big companies access to a larger market by allowing them to operate with a greater geographic reach. For more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes an increase in production costs. This is called diseconomies of scale.

Related Terms:
• Economic Profit
• Economic Value Added—EVA
• Law of Demand
• Law of Supply
• Market Economy