what exactly are economies of scale? how do they come about, and what do they do exactly?
In: Economics
Say that you’re going to make a 3 inch deck screw. You make it on a lathe and with a metal chisel to cut the slots for the screw driver. It takes you a couple of hours to get it done. This is now a pretty expensive screw. Next you make a machine that cuts the threads and stamps the head. But it only does one screw at a time. And so it can make 60 an hour. Even taking into account the cost of the machine, these are cheaper screws.
Now suppose you make a really serious version of this machine. It can make the screw in 10 seconds and it has 20 stations. So it can make 120 screws per minute. Again, taking into account the cost of the machine spread over millions of screws, these are much cheaper screws.
This is economy of scale.
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