What happens when a firm experiences economies of scale?

When a firm experiences economies of scale, it achieves a reduction in the average costs of production as its output increases. This occurs because fixed costs, such as rent and salaries, can be spread over a larger number of goods produced, leading to lower per-unit costs. Additionally, larger firms may access bulk purchasing discounts on raw materials and utilize more efficient production processes or technology, which further drives down costs.

As a result, firms that can produce at a lower average cost can enhance their competitiveness in the market, allowing them to potentially lower prices or increase their profit margins. This reduction in average costs is a fundamental reason why many companies seek to grow in size and increase their output, as it gives them a competitive advantage.