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Economies of Scale

Definition

Economies of scale refer to the cost advantages that a company can achieve when it increases its production and expands its operations. As the volume of output increases, the average cost per unit decreases.

Analogy

Imagine you're throwing a party. The more people you invite, the cheaper it becomes for each person because you can buy in bulk and share resources like food and drinks. This is similar to how economies of scale work in business.

Related terms

Diseconomies of Scale: Diseconomies of scale occur when a company's costs per unit increase as it grows too large. It may experience inefficiencies due to coordination problems or increased bureaucracy.

External Economies of Scale: External economies of scale are cost reductions that benefit all firms in an industry or region. For example, if multiple companies in an area have access to specialized suppliers, they can all enjoy lower costs.

Internal Economies of Scale: Internal economies of scale are cost advantages specific to a particular firm resulting from its own growth and expansion. These could include factors like improved technology, better bargaining power with suppliers, or enhanced specialization.