I’m in my economics class and half of what I’m learning makes no sense. Part of it is the way things are explained—I have ADD, so comprehension is difficult for me.
No matter how many time I read I just can’t understand it.
In: 4
Economy of scale:
You build a toy car by hand. Each one is special parts and hourly work and is pretty expensive when everything is tallied up.
You start a factory that makes this toy car. Sure, the machines/building/employees are expensive, but now the parts are bought in bulk and 1000 toys can be made in 1 hour as opposed to, like 3. Production for the car because super low, even to the point of every car sold is more than enough to cover expenses.
Diseconomy:
The business gets bigger, more employees and cost bloat like rents end up making a big business cost more to keep running than a small one.
I want to make a loaf of bread. To do this, I need to grow some wheat, grind it into flour, add yeast, and bake it.
**Economy of Scale** my bread making is established, but now I’m making a lot of bread. Instead of grinding the grains by hand, I look into a fancy windmill with a grinding wheel attached. This is much more expensive to build, but once it’s done I can grind nearly 10 times as much wheat without adding any more workers.
In short: scaling up means you can leverage processes and equipment that make it more efficient to produce, lowering the cost per loaf, increasing per loaf profit.
**Diseconomy of scale** my bread making is scaling up wonderfully, but if I want to expand and sell more bread, I need to figure out a way to get it away from my bakery and into more shops. I hire a crew of teamsters who put the bread into carts and carry it everywhere. I also start adding more preservatives – salt – to my bread to make it so that it can last longer in transport.
In short: when scaling up, new problems at scale emerge that increase the cost per loaf, reducing per loaf profit.
Heres what made it make sense to me: Say you double the amount of employees you hire.
If the amount of product you make more than doubles, you’re experiencing economies of scale because as you “scale up,” your additional product outpaces you additional costs.
If the amount of product you make less than doubles, you’re experiencing diseconomies of scale because as you scale up your input, workers, your product doesn’t scale up as quickly.
Hope this helped.
An economy of scale is when a company can produce goods at a lower cost per unit because it is producing in large quantities. A diseconomy of scale is when a company’s costs go up as it produces in larger quantities.
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