What are economies of scale?

Economies of scale refer to the phenomenon where a company's per-unit costs decrease as it increases its level of production. This occurs because as firms produce more, they can spread fixed costs—such as rent, machinery, and administrative expenses—over a larger number of goods. Additionally, companies may also benefit from operational efficiencies, bulk purchasing of materials, and specialization of labor at larger production levels, which further contribute to reduced costs per unit.

Understanding economies of scale is crucial for businesses aiming to enhance competitiveness and lower prices while maintaining or increasing profit margins as they grow. This concept underpins many strategic decisions regarding production expansion and market entry strategies.