Help Center

Home

Financial Terms and Glossary

Economies of scale

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.

Key points

• Cost advantages gained by increasing production.

• Lowers per-unit costs as output grows.

• Common in large-scale manufacturing and businesses with high fixed costs.

Quick Answers to Curious Questions

What are economies of scale?

Economies of scale are cost advantages that companies experience when increasing production, reducing per-unit costs.

How do companies achieve economies of scale?

Companies achieve economies of scale through improved efficiencies, bulk purchasing, and better resource utilization.

Why are economies of scale important?

They help companies reduce costs, improve profit margins, and gain a competitive edge in the market.

scroll top