Economies of scale describe the advantage a firm gains when its average cost falls as output grows.
A larger producer may spread fixed costs, such as factory rent, software systems, or management, across more units. It may also negotiate lower input prices, use specialized machinery, or assign workers to narrower tasks. These effects can reduce the cost per unit as production expands.
Economies of scale are different from economies of scope. Economies of scale concern producing more of the same output, while economies of scope concern producing multiple products together more cheaply than producing them separately. A firm can experience either or both.
The benefit is not unlimited. Very large organizations can face communication delays, bureaucracy, and coordination problems. When average cost rises as output expands, the firm experiences diseconomies of scale. Industries such as utilities often have strong scale economies because infrastructure costs are high, while many small service businesses may reach efficient scale quickly.