In other words, the production process becomes more efficient as more goods are produced. This is the idea behind “warehouse stores” like Costco or Walmart. For example, it’s far cheaper and efficient to serve 1,000 customers at a restaurant than one. Economies of scale are achieved when increasing the scale of production decreases long-term average costs. This idea is also referred to as diminishing marginal cost. It usually occurs when the firm expands its production and the average cost of output starts diminishing. Economies of scale occur when operational efficiencies are in place that make the business more productive, consequently driving down the cost of every unit. According to Cairncross, “Internal economies are those which are open to a single factory or a single firm independently of the action of other firms. Economies of scale is an economic term that is also known as diminishing marginal cost. When a firm expands its scale of production, the economies, which accrue to this firm, are known as internal economies. Economies of Scale Definition. As a company gets bigger, it benefits from a number of efficiencies. Economies of scale occur when a business benefits from the size of its operation. Economies of Scale Definition. Learn more about the different kinds and what they can mean for you. Definition: Economies of scale refers to the cost savings a company can earn by increasing the size of their operation or number of units produced. Economies of scale is a term that refers to the reduction of per-unit costs through an increase in production volume. Economy of scale definition is - a reduction in the cost of producing something (such as a car or a unit of electricity) brought about especially by increased size of production facilities —usually used in plural. External diseconomies of scale are the result of outside factors beyond the control of a company increasing its total costs, as output in the rest of the industry increases. Learn more. Economies of scale describe the link between the size of a company and its product production cost. Economies of Scale Definition. Let's assume that it costs Company XYZ $1,000,000 to produce 1 million widgets per year (or $1.00 per widget). Internal Economies. At its most basic level, economies of scale occur due to specialization and the division of labor. In everyday language: a larger factory can produce at a lower average cost than a smaller factory. Example of Economies of Scale. In other words, the cost of production per unit decreases as a company produces more units. Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. 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