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LSDefine
Simple English definitions for legal terms
economy of scale
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A quick definition of economy of scale:
Economy of Scale: When a company makes more of a product, the cost to make each one goes down. This happens because the company can use bigger machines and buy materials in bulk, which makes the process more efficient and saves money.
A more thorough explanation:
Definition: Economy of scale refers to the decrease in the cost of producing a product per unit as the production output increases. This is usually due to the increased efficiency of large-scale production processes.
Example: A company that produces 1000 units of a product may have a higher cost per unit than a company that produces 10,000 units of the same product. This is because the larger company can spread its fixed costs (such as rent, salaries, and equipment) over a larger number of units, resulting in a lower cost per unit.
Explanation: The example illustrates how a larger production output can lead to a decrease in the cost per unit of a product. This is because the fixed costs of production are spread out over a larger number of units, resulting in greater efficiency and cost savings. This is known as the economy of scale.