Eli5 what is economy of scale and what is economy of scope?

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Its 3 am and i dont have the brain activity to understand anything anymore. Please be as patronising as possible.

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Anonymous 0 Comments

Economy of scale has to do with automation.

I am using “hours” as a fungible resource. A hodge-podge of money/cost/manpower that covers all of those things (this is a vast simplification).

Previously if you wanted produce something, a single person would make it. It would take them an hour to make the first one and the second one and the third one.

Then came along automated factories.

Once the factory is running the amount of manpower needed to produce the same product is 1/1000 of a hour to produce each and every unit.

The issue is takes 10,000 hours to set up the factory (you have to spend those 10,000 hours).

So if you use the factory to produce 1 unit, that unit has cost you 10,000.001 hours to produce that unit.

If you produce 10 units, it has cost you 1,000.001 hours to produce each unit.

If you produce 10,000 units it costs you 1.001 hours to produce each unit.

If you produce 100,000 units is costs you 0.101 hours to produce each unit.

This is the economy of scale. The factory costs manpower (or money) to set up and get running. To make the factory cost competitive to the guy down the street that can make one unit an hour, the factory has to produce at more than 10,000 units (which will take you 10 hours to do) in order to sell at the same price as the guy down the street. As you produce more units, the total price to produce the units continues to go down.

And once you have paid off the cost of the factory, you can lower prices even more to just cover cost of manufacture.

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