Economies of Scale

Economies of Scale refers to the cost advantages associated with increasing the volume and/or rate of production. Imagine a company’s annual lease on their factory premises is $200,000 per year. If they make 100,000 units, the cost is 200,000 / 100,000 = $2 per unit. If they crank up production to 200,000 units, then the lease component of the cost of goods sold falls to $1 per unit.