economy of scale

In economics, where the average cost of production, and therefore the unit cost, decreases as output increases. The high capital costs of machinery or a factory are spread across a greater number of units as more are produced. This may be a result of automation or mass production. If output increased by a factor of two, for example, the cost of production would increase by less than a factor of two. Economies of scale can be categorized as external economies of scale or as internal economies of scale.

In business, economies of scale are usually considered in relation to specific areas of the production process, which may be technical, managerial, marketing, finance, and risk. Economies of scale can also be produced when firms that need similar services locate together, sharing the costs of their services (for example, on industrial estates). In achieving economies of scale, many factors must be considered, not least the demand for a particular product.