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What is Economies Of Scale?

Definition of Economies Of Scale

Economies Of Scale is the decrease in the marginal cost of producing one additional unit of a given product, and most often occurs as a company expands its operations to tipping point where greater division of labour is effected, bulk buying can be achieved, and technological and administrative costs are financed against the backdrop of a much greater output of products. Economies Of Scale can be internal to the company; for example technological or administrative improvements to the operation would allow the company to reduce their variable costs (notably wages), while still producing the same volume, if not greater, of products; meaning that the marginal costof each product has decreased. Alternatively, Economies Of Scale can occur from external factors, such as the reduction in cost of raw materials would mean that the marginal cost of producing one additional unit would decrease, as the variable cost has been reduced. Economies Of Scale does not incorporate the numerous fixed costs, associated with production, for example: electricity, machinery, ground rent.
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