What are economies of scale?

Economies of scale refer to the phenomenon where the average cost per unit of production decreases as the scale of production increases. This can happen for several reasons: as firms produce more, they can spread fixed costs, such as administration and machinery, over a larger number of units, which reduces the average cost per unit. Additionally, bulk purchasing of materials may lead to discounts, and increased production can enhance operational efficiencies, leading to lower variable costs.

This concept is fundamental in microeconomics because it explains how larger firms can achieve competitive advantages over smaller firms by reducing costs. Therefore, the answer highlights the beneficial aspect of increased production in terms of achieving lower average costs, making it a cornerstone of business strategy and economic theory.