Scale refers to the size of something. So in the simplest of terms, economies of scale refers to the advantages for a firm of getting larger and larger in size. In this case, size is measured by the firms total output.
Generally speaking, as a firm produces more output, the day to day operations of the business become more efficient and the average cost of producing one unit of output decreases.
Economies of scale are separated into internal economies of scale (the advantages that occur for one firm as they get larger) and external economies of scale (the advantages for all firms in an industry as an industry gets larger).
What are the internal economies of scale?
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What are the external economies of scale?
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Key terms:
Average cost – the cost of producing one unit of output.
Raw materials – the basic resources which a firm uses in the production of a good.
Investment – increase in the capital stock of an economy.