Final answer:
Economies of scale describe the reduction in the cost per unit resulting from increased production, allowing companies to leverage larger-scale operations to achieve lower costs. An example is apparent in warehouse stores like Costco, where large-scale operations reduce prices, and in the chemical industry, where larger pipes more efficiently transport greater volumes of chemicals. Natural monopolies in utilities also demonstrate economies of scale by spreading fixed infrastructure costs over many users.
Step-by-step explanation:
Economies of scale refer to the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. An example of economies of scale occurs in warehouse stores like Costco or Walmart, where their large-scale operations allow them to offer products at lower costs compared to smaller stores.
In the chemical industry, economies of scale are evident when considering the cost of piping. A pipe with double the circumference can carry four times the volume of chemicals because the pipe's cross-section area rises by a factor of four, improving the efficiency of material usage relative to the amount transported.
Another example includes industries with characteristics of a natural monopoly, such as water and electric companies. The fixed costs for infrastructure, like main pipes and electric lines, are high, but the marginal cost of serving an additional customer is low. This makes it more efficient for one producer to serve the entire market rather than having multiple companies duplicate the capital investments.