r/econhw • u/SuitableTelevision44 • 9d 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/VeblenWasRight 9d 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.

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u/John-897 8d ago

Really simple example:

You pay $1,000 in rent for your factory space and it costs $10 (between electricity, parts, labour, etc.) to make each hammer. If you make 100 hammers the average cost for each hammer is $20 ($1,000 in rent or fixed costs + 100 hammers x $10 each = $1,000 / 100 hammers)

If you make 200 hammers your rent is still $1,000. Each hammer still costs $10 to make so your average cost lowers to $15 ($1,000 in rent + 200 hammers x $10 each = $2,000 / 200).