Economies of Scale
Plain definition
Cost advantages that arise when expanding production lowers the long-run average cost per unit.
In economics
Economies of scale occur when inputs or processes become more efficient at larger scale — bulk purchasing, specialization of labor, spreading R&D or advertising over more units. They make the LRAC curve slope downward and are a major reason firms grow and industries concentrate.
Example
A car factory producing 500,000 vehicles a year can use specialized robots and bulk steel discounts, cutting cost per car well below what a 5,000-car plant achieves.
Economies of scale are confused with increasing returns to scale. They are related but distinct: returns to scale describe the physical input-output relationship, while economies of scale describe the cost relationship. Also, economies of scale are long-run; do not confuse them with spreading fixed costs, which is short-run.