Economies of scale refers to the phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm.
Similarly, the opposite phenomenon, diseconomies of scale, occurs when the average unit costs of production increase beyond a certain level of output. At the point where the average costs are at a minimum, the minimum efficient scale (MES) of output of a firm or plant is reached.
A distinction is often made between different types of economies of scale such as:
- Product specific economies of scale; and
- Plant specific economies of scale.