What are economies of scale?

Economies of scale refer to the cost advantages that a business can achieve as it increases its level of production. Specifically, as production increases, the average cost per unit typically decreases. This happens because the fixed costs of production are spread over a larger number of goods, leading to a reduction in the cost associated with each individual product. For instance, buying raw materials in bulk often comes at a lower price, and operational efficiencies can be gained as businesses scale up.

As production grows, companies may also benefit from enhanced labor specialization and more efficient use of equipment, which can lead to further reductions in average costs. Thus, the notion of proportionate savings in costs gained by increased levels of production aptly captures the essence of economies of scale. This concept is fundamental in business strategy and sustainability accounting, as companies look for ways to maximize efficiency and reduce waste as they grow.