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As the quantity of a good being produced increases from Q to Q2, the average cost of the good decreases from C to C1

Economies of Scale are the cost advantages that a firm obtains due to expansion. They cause the average cost of a good to decrease as the quantity, or scale, of production of that good increases. This decrease in average cost is caused by diffusion of the initial investment of capital over a large number of individual products.


An example of a firm that could benefit from economies of scale is a factory. If the factory invested a large amount of capital to purchase a building and machinery in order to only build a few products, the average cost of the products would be high, due to the high fixed cost. If the factory built a large number of products, the fixed costs would be distributed over a large number of individual products, reducing the average cost of the product.

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