economies of scale (1 Viewer)

[sanshi]

whats economies of scale? and theres diseconomies too??????

 

[Conspirocy]

economies of scale really quickly is the fact that as a production process gets larger, it becomes cheaper to do things, up to a certain point

you when there are economies of scale you experiance increasing returns to scale, which means the you get more of an output from the resources you put in

this can only occur for so long...then you start to experiance diseconomies of scale, which is when you get too big and become ineffecient due to your size

here you exhibit decreasing returns to scale - which is the opposite of increasing returns to scale

best example is to think of a mcdonalds shop

think of the number of employees, and the amount of hamburgers they can make

employees...........hamburgers per hour
1---------------------------20
2---------------------------30
3..................................35
4----------------------------40
5 ---------------------------40
6 ---------------------------35
7 ---------------------------30
8 ----------------------------25

as you can see the more employees they add, at first the can increase production. as they get larger then it isnt as productive, because only so many people can work behind the grill in mcdonalds and so they start making less burgers.

note: economies of scale usually refers to factory size, not actual people...so use the same example and think of the size of a factory getting larger and larger, from 1 - 2 - 3 and so on. the same thing will happen,

note the part at 4 and 5 where output doesnt change, this is called constant returns to scale

 

[Calculon]

The example described above doesn't necessarily demonstrate this principle, because employees cost money to hire and so the cost of production per item may, in fact, be higher when you have two employees. A better example would be Adam Smith's pin problem:

To take an example, therefore, from a very trifling manufactureÑbut one in which the division of labor has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labor has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labor has probably given occasion), could scarce, perhaps, with his utmost industry make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head: to make the head requires two or three distinct operations to put it on, is a peculiar business, to whiten the pins another; it is even a trade by itself to put them into paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upward of four thousand pins of a middling size. Those ten persons, therefore, could make among them upward of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of proper division and combination of their different operations.

To use a simpler example, if I went from one employee to two, and tripled production because I had one cooking the patties and the other putting the burger together, I would be experiencing an economy of scale.

 

[sanshi]

oh ok
thanks for the information Conspirocy & Calculon :wave: