Economies of scale are also known as increasing returns to scale. This concept refers to the cost advantage that arises with increased output of a product. As the scale of production increases, the cost per unit of the product decreases. This happens because fixed costs are spread over more units of output, and operational efficiencies are achieved.
For example, a factory that produces more units can spread its fixed costs like rent and machinery over a larger number of units, reducing the cost per unit. Additionally, bulk purchasing of materials and more efficient use of labor and technology further contribute to lower costs.
In summary, economies of scale lead to increasing returns to scale, where the cost per unit decreases as production scales up.