What are economies of scale?

Economies of scale describe the positive effects of increasing production to a firm. The principle is that as output increases, it could be the output of shirts, for example, then the average cost per shirt will fall. This is because the costs of production are spread over higher output. Consequently, the firm is able to become more profitable as average costs fall. We should be aware that there is a limit to the usefulness of economies of scale, as once production increases beyond a certain point, the costs of production will begin to rise again if more investment in land, labour or capital is required.