Economies Of Scale

A firm exhibits economies of scale if the average cost of producing a good falls as the volume produced rises.

Fixed costs are an important source of economies of scale.

Example

Say a hamburger store has fixed costs of $10,000 per month (store rent, salaries, insurance, utilities). The variable cost per hamburger is $0.50 (variable costs are those that vary with the quantity of burgers produced e.g. ingredients, labor).

Quantity Produced (per month)	Fixed Cost (per burger)	Variable Cost (per burger)	Average Total Cost (per burger)
10,000	$1	$0.50	$1.50
20,000	$0.50	$0.50	$1.00
50,000	$0.20	$0.50	$0.70

As the quantity produced increases the average total cost falls.

Also know as increasing returns to scale.