What are economies of scale?

Economies of scale refer to the cost advantages that a business can achieve as it increases its output. These advantages arise because, as production scales up, the average cost per unit typically decreases. This happens for several reasons, including the ability to spread fixed costs (such as administrative expenses and rent) over a larger number of goods, as well as negotiating better terms for bulk purchases of materials and gaining access to more efficient production techniques or technologies.

For instance, a large manufacturing facility can produce units more cheaply than a smaller operation due to its ability to invest in specialized machinery or automate processes. Additionally, bulk purchasing can lead to discounts from suppliers. Overall, the concept of economies of scale allows businesses to improve their profitability as they grow, reducing per-unit costs, which can then result in competitive pricing in the market.