What is economies of scale? And how does it impact cost?
Economies of scale are cost advantages reaped by companies when production becomes efficient. Companies can achieve economies of scale by increasing production and lowering costs. This happens because costs are spread over a larger number of goods. Costs can be both fixed and variable. Economies of scale can be both internal and external. Internal economies of scale are based on management decisions, while external ones have to do with outside factors.
Think I ought to clarify the previous answer since it's not quite revision-perfect. Economies of scale refers to a decreasing average cost for an increase in quantity. This occurs when marginal cost, the change in cost for any additional unit produced, is below average cost. Super important concept in firm theory :) Explains why big companies like tech giants Facebook and Google are so successful, as well as many manufacturing companies. The main reasons why it occurs are: - a decline in high initial costs (such as premiums on small quantities from factor inputs) - 'learning with experience', machinery or workers become more productive - organisational efficiency - utilisation of spare capacity, such as in transport or storage - reduction of risk Don't get it confused with diseconomies of scale or increasing returns to scale! Both of those are easily-confused terms.
Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers. Most firms find that, as their production output increases, they can achieve lower costs per unit. By expanding the scale of production, you reduce the average unit cost of production.
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