Economies of scale refer to the cost advantages that companies experience when production becomes efficient, as costs can be spread over a larger amount of goods. This means that as a company grows and production units increase, it has a better chance to decrease its costs. Economies of scale can be realized by a firm at any stage of the production process, and they can apply to a variety of organizational and business situations and at various levels, such as a production, plant, or an entire enterprise.

There are two types of economies of scale: internal and external. Internal economies of scale are realized when a company reorganizes the way its resources are distributed and used within the company, such as by increasing the efficiency of its equipment and personnel. External economies of scale, on the other hand, are enjoyed by an entire industry or sector of the economy, such as when the government announces that all steel producers who employ more than 10,000 workers will be given a 20% tax break.

Economies of scale are important because they can help provide businesses with a competitive advantage in their industry. Companies will therefore try to realize economies of scale wherever possible, just as investors will try to identify economies of scale when selecting companies to invest in. However, it is important to note that as firms get larger, they grow in complexity, and they need to balance the economies of scale against the diseconomies of scale, which occur when production is less than in proportion to inputs, resulting in inefficiencies within the firm or industry and rising average costs.