Dictionary / How companies make money
What Are Economies of Scale?
Economies of scale means the cost of making each item falls as a company makes more of them. Bigger companies can often sell cheaper and still earn more.
A simple example
A bakery pays $3,000 a month for its oven and shop. If it bakes 1,000 loaves, each loaf carries $3 of those costs. If it bakes 10,000 loaves, each carries only $0.30. Same oven, much lower cost per loaf.
Where it comes from
- Fixed costs spread over more sales.
- Buying in bulk at lower prices.
- Better machines and systems that only pay off at large size.
- Big brands that cost less to advertise per sale.
Why investors care
Scale can become an economic moat. A giant can charge less than a small rival and still keep a healthy profit margin. Small rivals struggle to catch up.
When scale stops helping
Very large companies can get slow, with too many layers of management. That is called diseconomies of scale.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Economic moatWhat protects a company from competitors.
Profit marginHow many cents of profit from each dollar of sales.
Business modelHow a company makes money, in one sentence.
Gross marginGross profit as a percent of sales.
RevenueAll the money a company takes in from sales.
Cost of goods soldThe direct cost of making what you sell.