An economy of scale refers to a decrease in the unit cost of production as production increases.
For example, a commercial bakery that produces 5,000 loaves per day has a per-unit cost of $0.60 in ingredients and energy. By expanding production to 20,000 loaves per day, it negotiates bulk ingredient pricing and reduces its per-unit cost to $0.38 — illustrating economies of scale.
Why it matters: They create a massive competitive moat; as volume increases, per-unit costs drop, allowing for either higher margins or dominant pricing.
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