I’ve read that term mainly while doing cost estimation for wind/soar projects. Confused what does that exactly mean.
In: Other
The other answers have it right, but aren’t giving very concrete examples.
The more you are going to use something, the more you can spend on it without changing the cost per use.
If I want to make a LEGO, I can use my 3D printer and get a pretty good LEGO piece. It will take about 3 hours, and then when it gets done I need to treat the piece to remove the weakness of being built with stacked layers of plastic, or it will shred apart when I try to get it unstuck from whatever I build. Plus to get it to fit as well as a normal LEGO, I would need my printer to be VERY well configured. This can easily take a few days of work on older printers.
To make a LEGO without a 3D printer would likely take even longer, and be far harder to get the precision I need with hand tools.
So, how are LEGO pieces made?
The company builds metal molds to inject plastic into. Then the pieces are measured to ensure they are EXACTLY the right size in every location along the part. If they are not perfect, the metal mold needs replaced/repaired. These molds cost many thousands of dollars (my memory wants to say a few million, but I find that hard to believe).
Let us claim the mold costs $20,000 and the machine to use the mold costs $150,000. The mold can make about 20 million parts before it has to be replaced, and the machine can last as long as 1,000 molds. The plastic used for one piece costs 0.3 cents
If I want to make one piece, using professional gear, it will cost me $170,000.003 per piece. I definitely want to hire a company to do this for me on their equipment, meaning I only spend on the mold, getting the part for $20,000.003. Again, makes a clear easy choice to hire someone to do it by hand, paying them for at most 3 days of work, so maybe $1,500 there.
If I make as many pieces as the life of the machine, it will cost me 0.0040075 dollars per piece.
So… one off the major cost is production technique. But at scale, the major cost is plastic. The equipment I use to make the parts quickly, accurately, and easily are nearly ignored at scale.
Basically what this means is that companies can achieve a lower average cost (cost per unit of product) by buying many things at one time. For example, if a company buys 100000 metal screws, they are able to get each screw at a lower price than just buying 1 screw individually.
There are many types of economies of scale, but the general idea is similar to the one I wrote above. Can refer to this for a more detailed explanation: [https://www.investopedia.com/terms/e/economiesofscale.asp](https://www.investopedia.com/terms/e/economiesofscale.asp)
I believe it refers to how businesses spend less money on their production because they get bigger. so as the business grows, their average costs go down because of things such as bulk buying, specialization, marketing economies etc.
Economies of scale means the more you buy the cheaper each unit becomes. One unit may cost one dollar, but five units may be only cost four dollars
Latest Answers