Economies of Scale

Doing things cheaper by doing them bigger.

You run a factory. There's a certain cost just for turning on the machines and bringing people into work. Once everyone is working and the machines are humming, the added costs of each additional item becomes lower.

Example: your factory makes clown noses. It costs $100,000 a week to run the factory. You can make 30,000 clown noses a week. So each nose costs about $3.33 to make.

You decide to add an extra shift. That's going to cost an additional $50,000 a week. You already have the machines, and much of the basic costs of your business were priced into that initial $100,000 that you were spending on the first shift. So for the second shift, there's only the additional labor cost.

With the new shift added, the total cost to run your factory is $150,000 a week. But the second shift allows you to double your output. Now you're making 60,000 clown noses a week. The total cost of each nose has dropped to $2.50 per nose. By making your company bigger, you made your output cheaper per unit.

Walmart is probably the company most famous for relying on economies of scale as a business plan. Because it's the biggest retailer in the world, Walmart can put pressure on suppliers, can afford to have its own transportation system (so it isn't paying trucking companies a margin to haul stuff all over the country), and can take advantage of a ton of incremental advantages that come with being huge...thus turning an essentially low-margin business into a massive money maker.