Economies of scale is an economic concept that describes growth in output such that the costs incurred during production are spread over an increased volume of production. When production increases, the per-unit fixed cost of production decreases. For example, if a pharmaceutical company develops a new treatment, the research and development costs are fixed costs. Once the drug is considered viable and approved for distribution, the drug maker experiences economies of scale as production and sale of the drug expand. The per-unit development expenditures decrease for each additional unit sold.
Specialization can lead to economies of scale because it allows for increased output. Economic theory indicates that specialization is conducive to growth. Specialization, in economic terms, means focusing on one task rather than multiple tasks toward productive output. This supports growth as specialization of labor, for example, allows workers to perfect one task rather than focus on many. As workers become more adept at a specialized task, they become more efficient and production increases.
An assembly line for a manufacturing company provides a useful example of specialization leading to economies of scale. Suppose a bicycle manufacturer has 10 workers each assembling 10 bicycles simultaneously. If the bicycle maker switches to an assembly line in its factory, each of the 10 workers focuses on a specialized aspect of the assembly process, increasing efficiency and allowing for additional bicycles to be produced. Because production increases, the fixed costs of production such as the building and tools used to assemble the bicycles are spread over an increasing number of products, thus achieving economies of scale.