Glamor Economics

Chapter 58

Chapter 8 Section 5 The Bigger the Scale, the Lower the Cost - Economies of Scale

Andrew?When Carnegie built his steel empire, the Carnegie Steel Company, he realized: "The lower the price, the lower the scale of production. Therefore, the larger the production scale, the lower the cost. . . , seize the market, and drive at full capacity, as long as the cost is well controlled, profits will naturally come.” In economics, this phenomenon is called “economies of scale”, which refers to the increase in output levels or the expansion of production scale. A reduction in the average cost of a product.

Generally speaking, as the output increases, the production scale of the manufacturer gradually expands, and finally the expansion of the manufacturer's scale makes the production in the stage of economies of scale.

Suppose a large brewery produces 10 tons of beer per month, consumes 100 units of capital and 50 units of labor.The scale of production is now scaled up, using 200 units of capital and 100 units of labor (doubling the scale of production).The resulting changes in income may have the following three situations:

1. When the output is greater than 20 tons, the increase in output is greater than the increase in factors of production. This is called increasing returns to scale.

2. When the output is less than 20 tons, the increase in output is less than the increase in factors of production. This is called diminishing returns to scale.

3. The output is equal to 20 tons, and the increase in output is equal to the increase in factors of production. This is called constant returns to scale.

In actual production, we also see that most enterprises are striving to expand the scale of production.Then, as the scale increases, why is it likely that there will be increasing returns to scale?There are two main reasons.

First, large-scale production helps to better realize specialized division of labor and collaboration.The great poet Li Bai saw an old woman grinding an iron pestle when he was a child, "As long as you work hard, the iron pestle can be ground into a needle", so he was deeply inspired and worked hard to study.As an inspirational story, the behavior of the old lady is very instructive.But from the perspective of enterprise production, the efficiency is too low.

Adam, the father of economics in the 18th century?Smith has already illustrated this problem with the example of the pin industry in "The Wealth of Nations".A professionally trained person can only make one pin in a day, but if the production is divided into 18 processes, and each person only undertakes one process, on average, the per capita daily output of pins can reach 4800.This has vividly illustrated the significant role of economies of scale.

Second, in addition to the factors of production collaboration, the characteristics of some production factors also require economies of scale.Certain large pieces of equipment are generally less expensive to manufacture and maintain per unit of output than small pieces of equipment.For example, if the diameter of an oil pipeline in the world is doubled, its circumference will be doubled accordingly. However, according to the simple area calculation formula, the cross-sectional area of ​​the oil pipeline will exceed 1 times, that is, its transportation capacity will also exceed 1. times.This is the economy of scale, and the transportation cost per unit of crude oil will decrease accordingly.In addition, advanced techniques and technologies such as computer management and assembly line operation can only be adopted when the output reaches a certain level.For example, in automobile manufacturing, when implementing assembly line operations, its cost advantage is very obvious.The Ford Motor Company of the United States took the lead in applying mass production technology, which greatly reduced costs and became a leader in the automotive industry.

In reality, how large scale can be adopted to minimize costs depends on the characteristics of the enterprise's production and market.From the perspective of production, the larger and more specialized the equipment used in an industry, the more complex the technology, the more innovations, the larger the scale, the better; from the perspective of the market, the higher the degree of product standardization, the more stable the demand. The scale can be bigger.For example, in heavy manufacturing industries such as steel, chemicals, and automobiles, the scale of these enterprises is often quite large, and it is difficult for small enterprises to survive in these industries.

To achieve economies of scale, we must first seek to effectively reduce unit costs.

The first is that average cost has been falling as output has increased.The production technology of this industry is characterized by the need for a large amount of investment at the beginning. When the output increases later, the cost per unit of product increases is not much, and the initial investment is allocated to more and more products, so that the average cost is getting smaller and smaller. .

The second situation is that no matter how the output changes, the average cost remains basically the same.This kind of industry is generally insignificant in the economy, its market demand is not large, its output is not large, the production factors used are not relatively scarce in the economy, and it does not compete with other industries for production factors, so even if the output increase, the price of elements will not rise, and the cost will not increase, and the initial investment is not large, such as pens and other small items.

In fact, it is more of the third situation. As the output increases, the average cost first decreases.When the output increases to a certain amount, the average cost reaches the minimum.If output increases further, average cost increases.That is to say, the average cost first decreases with the increase of output, and then increases with the increase of output.And the output when the average cost is the lowest is the output of moderate scale.

[links to related words]

The total output refers to the maximum output that can be obtained by inputting a variable factor of production under the condition that other conditions remain unchanged.

Diseconomies of scale Economies of scale do not mean that the larger the scale, the better. For a specific production technology, when the scale expands to a certain extent, there will be diseconomies of scale in production. The main reason for the diseconomies of scale is the low efficiency of management.Due to the large scale, the cost of information transmission increases, the signal is distorted, and bureaucracy breeds, which makes the cost increase caused by the expansion of the scale even greater, resulting in diseconomies of scale.

(End of this chapter)