Economies of scale arise when you a place a bigger order, borrow a larger amount or produce higher product quantities. Why? Because, after the initial setup cost, which each supplier will charge for a minimum amount attributed to an order, for example, only marginal expenses will be incurred for the quantity required.
For example…
Take Lisa’s cupcake business, she was baking cupcakes for her friends’ birthday parties but has recently started receiving large orders from bakeries. It takes her the same time to go shopping for ingredients and set up her kitchen to bake cupcakes, whether she’s baking 40 or 200. For this, she charges $200. The number of extra ingredients and time is taken to bake the extra cupcakes will be added to this amount to get her final invoice. The economies of scale are generated in this example when the bakery orders more than 40 cupcakes.
