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Economies of Scale

The question of economies of scale has been explored since the Industrial Revolution. In fact, in his most important work, The Wealth of Nations, Adam Smith wrote about the benefit of increasing the size of a plant, which brings lower per-unit cost through specialization, or the division of labor, resulting in greater worker productivity. This concept later became known as economies of scale, defined as the per-unit decreasing cost advantages that a plant or an enterprise gains by increasing the overall size of operation. Thus, economies of scale imply decreasing long-run average cost per unit of output. This is because the fixed costs are spread out over more units of output; it is also the result of specialization and technological advances. On the other hand, ...

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