What is meant by 'economies of scale'?

Economies of scale refer to the phenomenon where the average cost per unit of production decreases as the quantity of output increases. This occurs because fixed costs, such as administrative expenses, rent, and machinery, are spread over a larger number of goods produced. As a company produces more units, it can also often negotiate better prices for raw materials and streamline processes, reducing variable costs as well.

By increasing production, companies can achieve greater efficiency, take advantage of specialized labor, and invest in more cost-effective technologies. This overall reduction in the average cost per unit helps improve profitability and can also provide competitive pricing advantages in the market.

The other concepts, such as limits on market size, fixed costs remaining constant regardless of production levels, or supply and demand balance, do not capture the essence of economies of scale, which is specifically centered on the cost advantages gained through increased production.