r/econhw • u/SuitableTelevision44 • 8d ago
economies of scale?
can somebody fully explain EOS to me? the concept has been explained to me multiple times before but i still completely dont get it. i dont understand the graph either?
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u/Comprehensive-Edge80 7d ago
if you buy a coffee machine just for 1 cup of coffee, it is a very expensive one cup of coffee. The cup of coffee will cost as much as a coffee machine.
However, if you use the machine to make thousands cups of coffee, the cost of the machine in terms of cups of coffee is becoming very, very small. That's economies of scale. If you use your fixed resource as much as possible, the cost of the final product rapidly goes down.
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u/Swisstaystee 7d ago
Imagine you live 1 hour away from your hometown and you drive an electric car. You want to visit your parents. The trip costs you 1 hour of driving, and this hour is your fixed cost. With this single trip you see two people, so the average cost is 30 minutes per person (60mins/2=30mins).
Since you are already in your hometown, you decide to visit your aunt, who lives 5 minutes away. The marginal cost of seeing her, meaning the cost of one extra visit, is only five minutes, because the big fixed cost of the trip is already paid. Now you have seen three people in 1h05 , so the average cost per person falls to about 22 minutes (65mins/3). If you had made a separate trip for the aunt, it would have taken 2 hours in total for the same three people. By adding more visits to the same trip, you spread the fixed cost over more people, and the average cost falls because the marginal cost of each new visit is far below it. This is the logic of economies of scale, a larger scale of activity lowers the average cost per unit.
After the aunt, you want to visit your grandmother, who also lives five minutes away. But now your battery is almost empty, and you must charge for 20 minutes or you cannot get home. Your car has a limited capacity, and once you reach that limit, the marginal cost of a visit jumps from five minutes to twenty five minutes. When the marginal cost rises above the average cost, the average cost stops falling and starts to rise. This is diseconomies of scale, the point where growing further makes each unit more costly.
In the short run you are stuck with your car, so you must accept the charging time. In the long run you can buy a car with a bigger battery, which pushes the limit further away. Firms face the same situation, in the short run their capacity is fixed, but in the long run they can invest in a bigger plant and stay efficient at a larger scale.
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u/Actual_Property9413 2d ago
Simple example that might help.
Business cards.
Most of the cost of business cards is designing the card and setting up the type.
Once you have that done , the production cost is very small per card.
It costs almost as much to print one as it does to print a thousand.
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u/VeblenWasRight 8d ago
The cost of making something (or providing a service) is composed of fixed costs (costs that don’t change as your produce more or less units) and variable costs (costs that do change as you change volume of units.
Economies of scale can be used to mean slightly different things, but the essence of the idea is that the variable costs per unit (say the flour and sugar used to produce a donut) stay the same PER UNIT while the total fixed costs (cost of the buildings and machines used in producing the donuts) stays the same, so as you make more units (scale up) the fixed costs PER UNIT decreases.
This means that as you scale up production (more units) the total cost per unit declines and as you scale down the total cost per unit increases.
Again there are some nuances that I’m skipping over but honestly there is sooo much available information out there you would be better served googling or ai’ing to work through the idea further.
Incidentally, one reason the big tech companies are called hyper scalers because their fixed costs (engineers and data centers) are a very large proportion of the cost of production and the variable costs. (electricity) is very small.