Economies of Scale Theory

Economies of scale refer to the cost advantages that a business experiences as it increases production. When a company produces more units, the average cost per unit typically decreases because fixed costs (like equipment or buildings) are spread out over more goods, and operational efficiencies improve. This allows for lower prices or higher profit margins. There are two main types: internal economies, from within the company (like bulk purchasing), and external economies, from factors outside the company (like industry growth). Overall, economies of scale help businesses grow more efficiently and competitively as they expand.