# Why are bigger versions of items often more economical?

234 views

So for example I might I have 500g bottle of iced tea that’s \$2.80 but then there’s a 1L version that’s \$3.00

Why is that?

In: 1

It’s like buying in bulk. The more you buy, the cheaper it is per unit. But you’re still spending more money, aren’t you? That iced tea probably cost 10 cents (maybe) to produce. At the end of the day, it’s an incentive to buy more.

Well there is a theory that the race of giants want to keep things affordable for themselves, that could be why

Economy of scale. Let’s say I make and sell bottled tea. I need a factory, machinery, labor, and raw materials. Factory rent, and machinery are both good for 100 million bottles a year. Factory rent is \$10,000 a month and buy the machinery for \$12,000. These costs are fixed. What that means is I would have to pay that if I make one bottle of tea or a hundred million bottles of tea. Labor and raw materials depend on the number of bottles I make – the more bottles the more tea leaves I buy and the more employees I hire.

Now if I produce only 1 bottle a month I still need to pay the fixed costs and minimum amount for raw materials and labor. So I would price that bottle at \$11,000 (factory rent + machine cost per month)+ whatever I paid for labor (\$1000), and raw materials (\$1,00)+ a little bit of profit(\$100). So I sell one bottle for \$12,200 if I want to stay in business.

If I produce 100,000 bottles the pricing changes. Now my expenses are \$11,000 (factory rent + machine cost per month)+ whatever I paid for labor (\$25,000), and raw materials (\$25,000)+ a little bit of profit. So now my expense per bottle is \$0.61. I can add \$0.39 as a profit and sell each bottle for \$1. My profit would be \$39,000.

Hope that explains it.

Let’s say iced tea costs the company 10 cents per L to produce.

* If you buy 500 mL for \$2.80, the company makes \$2.75 profit
* If you buy 1L for \$3.00, the company makes \$2.90 profit

So you feel like you’re getting a good deal, and the company turns more of your money into their profit, *even after accounting for having to make more product*.

TLDR: Bulk pricing encourages consumers to buy more, which makes the company a bigger profit.

(Yes I know I’m ignoring packaging costs and stuff. frodeem’s answer covers these economy-of-scale considerations very well)