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What is economies of scale?

Economies of scale illustrate the advantages companies are able to realize from increasing their volume or output. For example, if the fixed cost to operate in the automotive industry is $100,000, then producing 100 cars instead of 5 cars represents a lower fixed cost per unit and overall cost per unit. Due to the higher output, the company would have economies of scale.

Economies of scale example

This concept is often associated with scaling a business or microeconomics, and the top of barriers to entry. If there is a large upfront or fixed cost to produce one or a few cars, then a company might not enter that market as it would take years for them to reach the cost per unit that existing players in the industry already have. Other examples include shipping companies, distribution networks, etc.


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