What does economies of scale refer to?

Economies of scale refer to the cost advantages that a business can achieve by expanding its production. When a company produces and sells items in large quantities, it can spread its fixed costs over a larger volume of goods, thereby reducing the cost per unit. This is primarily because the costs associated with production, such as management salaries, depreciation of equipment, and rent, do not increase proportionally with production.

By leveraging bulk purchasing discounts, optimizing resource use, and increasing operational efficiency, businesses can significantly lower their average costs as they scale up. Therefore, producing and selling items in large quantities at a lower cost accurately captures the concept of economies of scale, highlighting the greater efficiencies and reduced costs associated with higher production levels. Reductions in average costs while increasing output exemplify the benefits of economies of scale.