What does this sentence mean?
"Economies of scale are experienced when average costs per unit of production fall as the size of output grows"
This sentence is describing the concept of economies of scale. Economies of scale refers to the phenomenon where the average cost per unit of production decreases as the output or production volume increases. In other words, it becomes more cost-effective to produce a larger quantity of goods or services.
To understand the meaning of this sentence, let's break it down:
1. "Economies of scale": This term refers to the cost advantages that arise when a company or industry increases its level of output or expands its operations. It implies that as production increases, the costs per unit decrease.
2. "Are experienced": This phrase suggests that economies of scale are observed or encountered when a business or industry reaches a certain level of production. It indicates that the effects of economies of scale can be seen in practice.
3. "Average costs per unit of production": Average costs represent the total costs incurred in producing a certain quantity of goods or services divided by the number of units produced. In this case, it refers to the costs associated with each individual unit of output.
4. "Fall": The term "fall" means to decrease or decline. It indicates that as production volume increases, the average costs per unit of production decrease.
5. "As the size of output grows": This phrase refers to the expansion or increase in the quantity of goods or services produced. It implies that as the production volume or output grows, the benefits of economies of scale become more apparent.
Overall, this sentence is explaining that when a business or industry increases its level of production, it can benefit from economies of scale, which lead to lower average costs per unit produced.