Economies of Scale (redirected from economy of scale)

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

The increase of efficiency in the making of a product by producing more of it. Economies of scale control costs carefully and extracts as much value out of every dollar spent as possible. For example, assume that labor costs at a factory are constant as long as the factory produces between 100,000 and 500,000 units per month. All other things being equal, economies of scale demand that the factory produce 500,000 units each month. Economies of scale are easier for larger companies that have greater control over their costs; indeed, it can give many larger companies a significant competitive advantage. See also: Diseconomies of scale.

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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