Economies of scale refer to the cost advantages that businesses experience as they increase their production levels. When a company produces more goods, the average cost per unit typically decreases. This happens because fixed costs, such as rent and salaries, are spread over a larger number of products, reducing the cost for each item. As companies grow, they can also negotiate better prices for raw materials due to bulk purchasing. Additionally, larger firms may invest in more efficient technology, further lowering production costs. Overall, economies of scale can lead to increased profitability and competitive pricing in the market.