Economies of Scale

Economies of Scale refer to the cost advantages that certain companies have due to their large size. Typically, the advantage arises due to the inverse relationship between the fixed cost per unit and the quantity produced: the greater the quantity of output produced, the lower the fixed cost per unit. In addition, companies’ bargaining power increases when they purchase in large quantities (bulk purchasing). This reduces the variable cost per unit as well. In the end, due to the lower per-unit costs, larger companies can price their products significantly lower than smaller competitors.