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Economics of scale is a term that is used to describe the reduction in cost-per-unit as more units are produced. For example, if a company makes 500 widgets, they cost the company 10 cents apiece to produce. Another company makes 100,000 widgets, and each widget only costs this company 5 cents apiece.
Economies of scale, in microeconomics, refer to the cost advantages that a business obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased.
The common sources of economies of scale are:
Each of these sources and factors aids in minimising the long run average costs (LRAC) of production.
Economies of scale is a very realistic and useful concept which is important for explaining real world events such as international trade, the number of firms in a market, and how firms expand and become bigger & bigger.
The concept of economies of scale also justifies the free and open trade policies, as some economies of scale may require bigger markets than what are available within a particular country.
