What Are "economies of Scale"?

Economic theory states that economies of scale are achieved when more units of a good or service can be produced on a larger scale, with lower input costs. Dis-economies of scale also exist. These occur when production declines against a backdrop of rising input costs.

Economies of scale are a worthy goal, since a company that can increase production while simultaneously lowering costs may enjoy a distinct advantage against competitors. Companies can achieve economies of scale in a variety of ways. One example is obtaining a discount on input costs through bulk buying. While it may be more difficult to obtain a discount on costlier inputs, such as research and development or skilled labor, the increased efficiency brought about by these inputs can ultimately lower the average cost of production and selling, therefore contributing to economies of scale. A company might also consider the use of specialized labor or machinery, and streamlining of the organizational structure.

While individual companies enjoy internal economies of scale, entire industries may benefit from external economies of scale. This occurs when the expansion of an industry's scope of operations results in a decrease in costs for all companies working within that industry. One example is when a new and improved transportation network benefits an entire geographic region.