In management, what term describes lower average cost per unit as a company increases production?

In management, economies of scale describe lower average cost per unit as a company increases production.

A business can gain scale when fixed costs are spread across more units, workers specialize, equipment is used more efficiently, or suppliers offer volume discounts. For example, a factory’s building and machinery may cost roughly the same whether it produces a small or large batch, so the fixed cost allocated to each item falls as output rises.

Economies of scale can be internal, arising from decisions within the company, or external, arising from growth in an industry or location. Better infrastructure, a deeper labor pool, and specialized suppliers can reduce costs for many firms in one region.

Scale does not always improve efficiency. Diseconomies of scale occur when a company becomes so large that communication problems, bureaucracy, coordination costs, or supply bottlenecks increase average cost. Economies of scope are different: they concern producing multiple products together more cheaply than producing them separately.