Economies of scale, big bigger and biggest!

Economies of scale is an advantage that a business gets when its running a huge production. The advantages make your average cost per unit to fall as the production scale is increased. When more goods can be produced on a larger scale with lower costs, economies of scale is said to be achieved.

What all those technical words means is that the more you make or buy the cheaper it gets, take for example a custom-made beer can, it’s expensive because it’s only made once and the company will profit little from it if they sell it cheap because there’s only one and it’s also expensive to make but when you up that scale up to Coca-Cola levels the can itself costs pretty much nothing because when you’re buying insane amounts of aluminum from a steel factory they earn a lot if they sell it at their regular price because of the number of units sold but since you’re buying insane amounts of aluminum they can make it cheaper for you.

it’s the same as buying in bulk, if you buy things one by one companies want to maximize profit per unit so they sell it expensive but when they are selling in bulk they lower the price because they sell many at once.

diseconomiesofscale[1]

This graph explains everything that i was talking about, the average cost lowers as output goes up but when output goes up too much the average cost will rise again causing Dis-economies of scale but I’ll talk about that later, in short: more=better, too much=not good

Refrences:
Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 157. ISBN 0-13-063085-3.

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