UK Accounting Glossary
Economy of scale (or economies of scale) fundamentally constitutes the increase in production output by way of improving production efficiency. In a fixed cost environment, economy of scale is indicative of lower-than-average cost per unit. Thus, for instance, having achieved economy of scale, the largest automobile maker may be able to produce a given car at a lower manufacturing cost than any of its competitors. Economy of scale presents outsized companies with vast geo-economic opportunities. Through economy of scale, they may penetrate and secure new markets that were once beyond reach. However, economy of scale is not without limits. Having reached its optimal economy of scale and capacity for output, a company may face swelling production costs. When that happens, the economy of scale is said to enter a diseconomy of scale.
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This glossary post was last updated: 9th February 2020.