Economies of scale describe the link between the size of a company and its product production cost. Learn more about the different kinds and what they can mean for you. External diseconomies of scale are the result of outside factors beyond the control of a company increasing its total costs, as output in the rest of the industry increases. In other words, the production process becomes more efficient as more goods are produced. Let's assume that it costs Company XYZ $1,000,000 to produce 1 million widgets per year (or $1.00 per widget). Economies of scale refers to the situation where, as the quantity of output goes up, the cost per unit goes down. Economies of Scale Definition. economies of scale meaning: the reduction of production costs that is a result of making and selling goods in large quantities…. This is the idea behind “warehouse stores” like Costco or Walmart. Example of Economies of Scale. Economies of scale is a term that refers to the reduction of per-unit costs through an increase in production volume. Economies of scale is an economic term that is also known as diminishing marginal cost. This means more can be produced if employees specialize in specific tasks. Definition: Economies of scale refers to the cost savings a company can earn by increasing the size of their operation or number of units produced. Economies of scale are achieved when increasing the scale of production decreases long-term average costs. Internal Economies. Economy of scale definition is - a reduction in the cost of producing something (such as a car or a unit of electricity) brought about especially by increased size of production facilities —usually used in plural. The term implies that the cost per unit of production decreases as the firm enlarges its production. For example, it’s far cheaper and efficient to serve 1,000 customers at a restaurant than one. In everyday language: a larger factory can produce at a lower average cost than a smaller factory. Economies of scale occur when operational efficiencies are in place that make the business more productive, consequently driving down the cost of every unit. At its most basic level, economies of scale occur due to specialization and the division of labor. As a company gets bigger, it benefits from a number of efficiencies. In other words, the cost of production per unit decreases as a company produces more units. Learn more. Economies of scale occur when a business benefits from the size of its operation. It usually occurs when the firm expands its production and the average cost of output starts diminishing. According to Cairncross, “Internal economies are those which are open to a single factory or a single firm independently of the action of other firms. When a firm expands its scale of production, the economies, which accrue to this firm, are known as internal economies. 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