What is "Economies of scale", explain and give an example.

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Explanation:

Economies of scale are the benefits of reduced cost enjoyed by a firm or a country when it increases production.  According to economies of scale theory, an increase in production increases efficiency, thereby reducing the costs per item.

Economies of scale arise due to the fixed costs element in production. Since fixed costs remain constant, a low volume production implies that the fixed costs will be spread among fewer units resulting in a higher per-unit cost.  As production increases, fixed costs will be shared among many units resulting in a lower per-unit cost.

Bulk buying results in economies of scale. The buyer enjoys larger discounts and reduced transport costs per item. Assume a truck charges $1000 to transport cargo from point A to B. transporting 500 items will result in a cost of $2 per unit.  Transporting 1000 items will cost $1 per unit.

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