what do you understand by economies of scale?

Economies of scale -

The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.

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. 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".

What Are Economies Of Scale?

When more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized. (Click on the 2nd link for the rest of this article)

Economies of scale: Example.

You have a truck. It cost $5.00 a mile to drive and can hold 10,000 lbs.

If you drive 100 miles with 1000 lbs, it costs 500.00 to carry 1000 lbs, or 50 cents per lb.

If you operate the same truck, on the same trip, but carry 10,000 lbs, it will cost you 5 cents per lbs.