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Definition of 'Economies Of Scale' The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale: -External economies - the cost per unit depends on the size of the industry, not the firm. -Internal economies - the cost per unit depends on size of the individual firm. Investopedia explains 'Economies Of Scale' Economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical reach. For the more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale". Read more: http://www.investopedia.com/terms/e/economiesofscale.asp#ixzz1qaeGZdIv
A company that is just starting up and starting to produce a product can increase its economies of scale as it is able to sell more and more of the product, at least at the beginning when it has excess capacity. wmw