What does 'economies of scale' mean?

The concept of 'economies of scale' refers to the phenomenon where the cost per unit of production decreases as the scale of operation increases. This occurs because fixed costs, such as equipment and facilities, can be spread over a larger number of units produced. As production expands, companies may also benefit from bulk purchasing of materials and more efficient use of resources, leading to lower average costs.

When a business grows and produces more goods, it often finds ways to streamline its operations, negotiate better prices for supplies, and take advantage of efficiencies that smaller businesses may not be able to achieve. As a result, the average cost of each unit produced becomes lower, which can enhance a company's competitiveness in the market.

This understanding of economies of scale is crucial for businesses planning their growth strategies, as it can significantly impact their pricing, profitability, and overall market presence.