Economies of scale – Example

As we can see in the entry economies of scale , we talk about the concept when certain advantages are achieved in a production in large volumes, as its name indicates.

The basis of these economies is that the average long-term costs in the production of “something” are decreasing. This, as we produce more of that “something.”

For us to understand each other, running on a large scale can mean some savings. In turn, it allows the best use of the resources we have.

Example of economies of scale

If among several friends we intend to take care of the manufacture of silk-screened t-shirts, the number 1 shirt we produce will have cost more than the number 100. Why is this so?

The manufacture of screen printed shirts will involve the purchase of blank shirts, ink, a screen printing machine and other raw materials . In addition, we have the expenses and inconvenience of spreading the word about our incipient activity.

That is, there are fixed costs (the machine to start screen printing), variable costs (as we produce more units we will need more blank shirts) and advertising and marketing (we have to make our product known).

If we assume the production of a large number of shirts, we will realize that by buying a large number of white units our supplier can make us a lower special price, as will happen with ink. In addition, the cost of the machine was already assumed for the first time and we will have developed a productive “know-how” (or “our way of working as a team”).

Economies of scale have been very important in the creation of large market companies and their historical functioning. In addition, there are also diseconomies of scale if the long-term average costs increase as the level of production increases.

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