Economies of scale occur when a company lowers its costs by increasing the amount of goods it produces. As a business produces more units, the average cost per unit usually goes down, which makes the company more efficient.

Main Types:

• Internal economies of scale: Cost savings that come from inside the company, such as buying materials in bulk, using specialized equipment, or having more efficient management.
• External economies of scale: Cost savings that come from the growth of the whole industry, such as better local infrastructure, a larger pool of skilled workers, or having many suppliers nearby.
• Diseconomies of scale: This happens when a company grows too large and its average costs start to increase due to problems like poor communication or lack of coordination.

Importance: This concept helps explain how market structures work and why large companies often become monopolies because they are more cost-efficient than smaller competitors.