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Economies of scale

Factors that lead to a reduction in unit costs as a business increases its output / size and scale of operations. In other words, doubling the output results in less than double the increase in unit costs. This is mainly because whilst variable costs increase as output increases, fixed costs remain the same (in the short term), and are spread over a greater number of units. Therefore, the average cost per unit is less. In addition, variable costs (and thus the average cost per unit) may actually be lower, due to discounts offered by suppliers on bulk purchases (purchasing economies). They include purchasing, technical, specialisation, marketing, financial and risk-bearing economies.

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