The Economies of Scale Theory

Economies of scale refer to the cost advantages that a business gains as it increases production. When a company produces more units, the average cost per unit decreases because fixed costs (like equipment and infrastructure) are spread over more items, and operational efficiencies improve. This means larger companies can often produce goods more cheaply per unit than smaller ones, giving them a competitive edge. However, beyond a certain point, increasing production may lead to inefficiencies and higher costs, known as diseconomies of scale.