Economies of scale are the benefits that can arise as a firm increases its output in the long run, leading to reduced average total costs. These cost reductions reflect improvements in productive efficiency. They may give a firm a competitive advantage in the market in which it operates, by enabling it to pass on lower prices to consumers and/or generating higher profits, which might be re-invested or passed on to shareholders.
Figure 1 shows that, as a firm increases its output from 0 to Q1 in the long run, average costs begin to fall up to output Q1, due to the effect of one or more economies of scale.
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