Economies of scale refer to the cost advantages that businesses experience when they increase their production levels. As a company produces more goods, the average cost per unit typically decreases. This happens because fixed costs, like rent and salaries, are spread over a larger number of products, reducing the cost for each item. For example, a factory producing widgets can lower its production costs by buying materials in bulk or using specialized machinery. As a result, larger companies often have a competitive edge over smaller ones, as they can offer lower prices while maintaining profitability.