Business Dictionary
Economies of Scale
A-B C-D E-G H-K L-N O-P R-S T-W
Economies of the scale refer to the phenomenon in economy where the average cost per unit produced decreases as the production output increase. In other words, as the production output increase the production costs decrease.
The effect of economy of scale occurs due to the fact that fixed costs of the companies are spread over the larger volume of units sold. At same time, the growing company is in position to require and get lower prices of raw material and services, due to the size and importance on the market. Finally, growing production and sales justifies investment in technology that may bring additional reduction of costs.
The opposite effect to economies of scale is the diseconomies of scale. The diseconomy of the scale occurs if the production volume decreases, while the fixed costs are the same.
Related Reading:
Diseconomies of Scale
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