What are economies of scale?

Economies of scale refer to the cost advantages that businesses experience as they increase their scale of operation, leading to a reduction in the per-unit cost of producing goods or services. As a company grows and produces more, it can spread its fixed costs over a larger number of goods or services, which typically results in lower costs per unit. This can occur due to various factors, such as bulk buying of materials, more efficient use of production techniques, and enhanced bargaining power with suppliers.

In contrast, the other options do not accurately capture the essence of economies of scale. While decreased employee productivity could occur in specific scenarios, it does not reflect the concept of efficiently scaling operations. Additionally, incurring higher costs while taking on additional projects contradicts the idea of gaining cost advantages. Lastly, having fewer large customers may not relate directly to cost efficiency and does not encapsulate the key principle of economies of scale. Thus, understanding economies of scale involves recognizing how larger operations can lead to cost efficiencies that benefit the business overall.