Final answer:
Economies of scale is a concept where the cost per unit decreases as output increases, exemplified by large businesses like Costco and Walmart. It also applies to cities, where concentration of economic activity leads to greater productivity. Governments balance the benefits of economies of scale against the risk of reduced competition.
Step-by-step explanation:
The concept that a larger business can operate more efficiently than a smaller one, benefiting from the ability to do things in a larger volume, is known as economies of scale. This phenomenon occurs when, as the quantity of output increases, the cost per unit decreases. For example, warehouse stores like Costco or Walmart capitalize on economies of scale by selling products in bulk at lower costs per unit compared to smaller retailers.
Further analysis of economies of scale can be applied to cities, where economic activities are concentrated because they can provide an efficient scale of operation. Cities offer a concentrated customer base, a diverse workforce, and a network of suppliers, supporting businesses to operate more efficiently. Attractions such as sports stadiums and museums also benefit from a large nearby population, echoing the economies of scale concept at a macro level.
In terms of economic policy, governments must weigh the advantages of large-scale production, which can dramatically lower average costs, against the potential drawbacks such as reduced competition, especially when companies grow through mergers.