Economies of Scale

A reduction in log-run average cost induced by an increase in a firm's output. There are two types of economies of scale:

-External economies - the cost per unit depends on the size of the industry, not the firm.
-Internal economies - the cost per unit depends on size of the individual firm.

Economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical reach, as exemplified by companies such as Walmart, Microsoft, and Apple. For the more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale".

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