Economies of Scale

Economies of scale are those advantages a firm obtains by expanding. Becoming larger can result in savings in a number of ways. Large businesses can save money by purchasing in bulk, by sharing highly trained managers, by being able to borrow at lower interest rates and by having access to a wider range of financial tools, by saving on marketing and advertising, and in other ways. Economy of scale is determined by measuring the cost of production per unit; if the cost per unit decreases after expansion, then economies of scale are said to have been realized. Expansion can, of course, also have counterproductive effects, called diseconomies of scale.