Economies of scale can reduce a company’s overall costs. As a production plant increases in size, the average cost per unit of output decreases. This reduction is due to the reduction in fixed costs, both capital and operating. It makes sense that equipment with double the capacity does not have to cost twice as much to purchase and operate. The average unit production cost is the sum of fixed costs plus variable costs/output. As the production plant grows, both the fixed and variable costs decrease. This decrease in fixed costs results in decreased overall costs.
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