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Economies of Scale
What does it mean?
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.
In Other Words...
Economies of scale gives large companies access to a larger market by allowing them to operate with greater geographical reach. But for the more traditional (small to medium) companies, size does have its limits, so after a point an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale".
Related Links
Economics Basics Tutorial - Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
Related Terms
Classical Economics | Diseconomies of Scale | Dismal Science | Economic Profit | Economic Value Added - EVA | Economics | Economies of Scope | Ramp Up
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