Notes

Economies of scale are the reduction in the per unit cost of production as the volume of production increases. In other words, the cost per unit of production decreases as volume of product increases. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods.

Costs per unit can decrease as the volume of production increases for different reasons. First, the fixed costs of production can be spread over a larger number of units as the volume of units produced increases. For example, if your fixed cost is $1,000 and you produce 10 units, the fixed cost per unit is $100 ($1,000 / 10 = $100), but if you produce 50 units, the cost per unit is only $20 ($1,000 / 50 = $20). Second, you can often save money by obtaining discounts for bulk purchases of raw resources used in production. Finally, costs may be reduced because the increase in volume may justify acquiring specialized equipment and specialized labor that can lead to more efficiency.