What is the concept of economies of scale?

The concept of economies of scale refers to the cost advantage that arises with increased output. Specifically, as production scales up, the average cost per unit tends to decrease. This is primarily due to the spreading of fixed costs over a larger number of goods and the potential for operational efficiencies that come with larger production volumes. For instance, when a manufacturer increases its production, it might be able to buy raw materials in bulk at discounted prices, negotiate better deals with suppliers, and utilize machinery more effectively.

This leads to lower costs for each unit produced, thus enhancing profitability. The concept is fundamental in understanding how businesses can expand their operations and increase competitiveness in the market. As a result, the statement accurately captures the essence of economies of scale by linking increased production to lowered costs per unit.