EXAMPLE

Economies of Scale

To illustrate the point further, imagine that your company produces automobiles. What would be the costs associated with producing your first car? You would need a factory, engineers, workers, and specialized machines and tools. Workers would need to be trained. These huge start-up costs would quickly add up, and your first car could end up costing millions of dollars to produce.

But, of course, you probably didn't get into the car business to make just one car. Imagine that instead of producing just one car, you make 100. True, some of your costs would increase-you would need more steel, more hours of labor from your workers, and perhaps your machines would need repairs and servicing. But you would also be able to spread out the up-front costs from your first car across the next 99. For example, you probably wouldn't need to create a design for your car again. You wouldn't need to build a factory, or invest in expensive machines. You wouldn't need to invest in additional training for your workers, who could make the next 99 cars just as they'd made the first one. By producing more cars, your total cost would increase, but your cost per car would decrease. If you were to make hundreds of thousands of cars in the factory, these decreases could be quite significant. This is an economy of scale.