Economies of Scale:

Earlier, organizations have accepted a concept known as Economies of scale, which states that the average unit costs of a good or service can be reduced by increasing its output rate. There are four principle causes why economies of scales may drive costs down when output increases; fixed costs are spread over more units, construction costs are drop off, costs of purchased materials are low, and process advantages are found.

Spreading Fixed Costs

In short term, certain costs do not vary with changes in the output rate. The fixed costs are debt service, management service etc. In accounting sense depreciation of plant and equipment already owned is also a fixed cost. As increments of capacity frequently are rather large, a firm firstly might have to purchase more capacity than it needs. Though demand that increases in subsequent years may then are absorbed without additional fixed costs.