| economy of scale n. pl. economies of scale The decrease in unit cost of a product or service resulting from large-scale operations, as in mass production. |
Economies Of Scale
The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.
There are two types of economies of scale:
External economies - the cost per unit depends on the size of the industry, not the firm.
Internal economies - the cost per unit depends on size of the individual firm.
Investopedia Commentary
Economies of scale gives large companies access to a larger market by allowing them to operate with greater geographical reach. For the more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale".
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See also: Classical Economics, Diseconomies of Scale, Dismal Science, Economic Profit, Economic Value Added - EVA, Economics, Economies of Scope, Ramp Up