economies of scale

Economies of scale refers to the savings a company experiences in costs through increased production levels. In other words, economies of scale can be defined as the cost advantages that come with efficient production. The larger a company is, the more cost savings it will experience. Consequently, they will also experience larger production levels.

For instance, if a supermarket or department store buys products in bulk, then they may experience a discount for the larger order. Therefore, they saved money and produced a lower average cost for each of those goods. Economies of scale also explain why smaller businesses may charge more for a product than a larger company. The cost that they can charge per unit is higher, since the larger companies may receive discounts for ordering in a large bulk quantity.