Final answer:
Economies of scale occur when increased production leads to lower cost per unit, exemplified by warehouse stores and often resulting in natural monopolies in certain industries.
Step-by-step explanation:
The concept of economies of scale describes the situation where, as the quantity of output increases, the cost per unit decreases. This phenomenon is critical for businesses to achieve cost-effectiveness in production. For instance, warehouse stores like Costco or Walmart exemplify this concept by producing goods on a large scale to lower the average cost per item. Moreover, in industries such as water and electricity, substantial economies of scale can lead to a natural monopoly, where a single producer serves the entire market more efficiently, avoiding the necessity and expense for competitors to replicate the infrastructure.
In the context of international trade, economies of scale can allow for a single large producer to supply an entire country, as seen in the example of a large automobile factory able to meet the demands of a smaller economy. However, this can result in limited consumer choice and reduced competition between manufacturers if no international trade occurs. In contrast, high demand can support multiple factories, all benefiting from economies of scale, leading to competition and variety for consumers.