How does an increase in production scale affect cost per unit?

An increase in production scale typically leads to a decrease in average costs due to a concept known as economies of scale. As a company produces more units of a product, it can spread its fixed costs, such as administration and production facility expenses, over a larger number of goods. This reduction in average costs occurs because variable costs per unit can also decline as businesses become more efficient with production processes, order larger quantities of materials at discounted rates, and potentially automate operations.

For example, a factory that doubles its production might not double its overhead costs, enabling the cost per unit to decrease as more items are produced. This effect provides businesses with a competitive advantage, allowing them to lower prices or increase profit margins. Thus, the relationship between increased production scale and reduced average costs illustrates a fundamental principle of production in economics.