Economies of Scale

Economies of Scale, factors that cause the average cost of production to decrease as output increases. Economies of scale are the driving force behind all mass production. For example, when printing a book, there is a large initial fixed cost in setting up the printing press. However, once the press is running the cost of printing each book remains nearly constant. Therefore, if it costs $1000 to set up the press and $1 to print each book, the unit cost per book will be $2 if 1000 books are printed, $1.50 if 2000 books are printed, and $1.10 if 10,000 books are printed. The same principles apply in car manufacturing, where the cost of producing 1000 cars is rarely 10 times the cost of producing 100 cars. Achieving economies of scale of this kind usually demands substantial investment. For example, car companies have invested large amounts of money in production lines with sophisticated robots in order to increase output and reduce unit production costs.

There are always limits to economies of scale. Large companies can become cumbersome and difficult to manage, which makes them vulnerable to competition from smaller, more innovative, and more flexible companies. In addition, even if a company has achieved the optimum level of economies of scale, it still faces the challenge of finding a market for its increased output.