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April, 2022 Edition
Hot Chocolate
Economies of Scale
 The theory of economies of scale derives from the reduced cost of production increases. Generally, as production increases, cost per unit decreases. A company already has the equipment and building space necessary to produce a given product, so these costs stay the same as production increases. Multiplying production returns without an equivalent growth in expense results in a lower price per unit.

Purchasing in volume also creates economies of scale. Buying and producing 2,000 items at 10% more than I acquired and delivered 1,700 items achieves economies of scale. I increased production by 15% while increasing my expenses by only 10%.

Balanced production can also produce economies of scale. For example, I have one plant working overtime to deliver 2000 units. I have another plant working under capacity and manufacturing 1500 units. If we balance production, so each plant fabricates 1800 units, we increase production and eliminate overtime expenses, reducing the price per unit.

Lowering interest rates on loans creates an economy of scale. More money is available when interest rates are low, so many businesses borrow more. A Business can use the additional funds to purchase in bulk, reducing expenses and increasing production.

Marketing that covers a larger area at the same price creates an economy of scale. The increased market reach lowers the cost per view resulting in a lower conversion cost.

When we take advantage of economies of scale, we can increase production while lowering our price per unit. Watch for opportunities to take advantage of this economic theory. Putting the theory in to practice may be different in each industry, but it is worth the effort.
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