Legal Definitions - economy of scale

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.