What are economies of scale?

Economies of scale refer to the cost advantages that a business can achieve as it increases its level of production. When a company produces more goods, it often becomes more efficient at doing so. This efficiency leads to a reduction in the per-unit cost of production. As a result, larger production volumes can spread fixed costs, such as administrative expenses or rent, over a greater number of goods, thereby decreasing overall average costs.

For example, if a factory produces 1,000 units of a product, the costs associated with running the factory, maintaining equipment, and paying staff are distributed across those 1,000 units. If production increases to 10,000 units, the same fixed costs are now distributed over 10 times as many products, effectively lowering the average cost per unit.

Other options do not accurately capture the concept of economies of scale. Increases in the number of goods sold pertains to sales volume, while reductions in employee numbers and higher selling prices do not inherently relate to the cost efficiency derived from large-scale production. The essence of economies of scale lies in the relationship between production scale and the cost benefits realized from that scale.