What is an Economy of Scale?
Economies of scale are the amount of savings on the cost per manufactured unit as it relates to the level of production. Generally, an economy of scale will indicate that with the production of additional units, the average cost of production for each unit will decrease, due to the distribution of some of the cost factors over a period of time. An economy of scale can also apply to situations where a company lowers the average cost of operation by opening additional facilities or expanding the operational aspects of the business in some manner. In terms of producing individual units for sale, a company has to purchase raw materials, build a production facility, obtain machinery and equipment, and hire employees to engage in the manufacturing process. Some of these initial expenses are fixed and will not change no matter how many units are produced. For example, the equipment may be used to produce a thousand units or ten thousand units without any change in the purchase price of that e
