Economies of Scale

Economies of scale refer to the cost advantages that companies experience as they increase production. When a company grows and produces more goods, it can spread its fixed costs over a larger number of units, reducing the cost per unit. This efficiency allows businesses to lower prices, increase profit margins, or gain a competitive advantage in the market. Economies of scale can result from improved operational efficiencies, bulk purchasing of raw materials, and better use of resources, making larger companies often more competitive than smaller ones.

Example

A car manufacturer reduces its average production costs by increasing output and buying materials in bulk, benefiting from economies of scale.