Economies of Scale in One Minute: Definition/Theory, Explanation and Examples
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- čas přidán 17. 07. 2019
- Economies of scale... there's a textbook example of a term everyone claims to understand but few people do, at least not in a meaningful manner.
Leaving definitions and the theory dimension aside, economies of scale is a term that refers to situation in which as your business grows, you are able to lower your cost per unit.
Examples include anything from scaling a small business to the negotiation power of let's say Walmart. In other words, a good explanation with respect to economies of scale has to revolve around the fact that under certain circumstances (very important subtlety here!), the growth of your business can help you develop an edge when it comes to production costs.
The "magic" of economies of scale takes place through, for example, the fixed costs dimension. The more orders you have, the more you can take advantage of the fact that unlike variable costs, fixed costs do not go up along with your volume.
However, please note that economies of scale do have their limits. Whether we're talking about your local market becoming saturated, a supplier running out of inventory or other examples, it's important to understand (and the video will explain this aspect) that we are in no way talking about a "universal panacea" here :)
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Whoever decided to make this video. You are the most amazing person I know. You have no idea how great you are at teaching. Thank you so much 🎉
Thanks so much Paula, your comment made my day :)
holy moly, what an easy and simple explanation, i've been trying to understand this for a long time but you've done it!
Just the type of comment I like to start my day reading, thanks a ton for the kind words :)
This channel deserves a million subscribers. Thanks for the help!
Heh... maybe one of these days :) Thanks a lot for the kind words!
Classic and to the point explanation, thanks a lot !
Thank YOU for taking the time to say something nice, really appreciate it :)
Only explanation that made me understand,thank you so much
Explained it to the point in a remarkable and excellent manner. Thanks.
Thank YOU for taking the time to say something nice Saqib, really appreciate it :)
Thanks a lot for making this vid.
I'm bad at English but I still get it,so amazing.
Genuinely happy to read this, you're more than welcome :)
Nice , thanks a lot , this is what I was searching for
Awesome, thank YOU for the kind words! :)
You are brilliant teacher seriously ❤
Nicely explained.
Saved my time, thank you
Few things make me happier than hearing that Vimala, thank you for the kind words and welcome to the community :)
@@OneMinuteEconomics It is the first time I see a person giving reply to all of the comments in the video of their channel, nice
Helped me understand economies of scale a lot! thank you!
Always happy to hear that :)
Finally a simple explanation… thank you!
You are more than welcome :)
merci beaucoup vos vidéos sont vraiment carrément simple à comprendre!
De rien :)
a video that actually explains the title very helpful
You are amazing, thank you man
Thank YOU for the kind words! :)
Thank you!!!
You're more than welcome, thanks a lot for taking the time to say something nice :)
very helpful, thank you!!
No, thank YOU for taking the time to say something nice :)
Thanks its help me a lot.. to learn economics in indonesia so difficult
Thank YOU for the kind words and support Nathania :)
Why difficult
卧槽我真的看懂了耶👍🏻好棒
How did you calculate per-plane cost in both profit and loss scenario?
Total cost of everything (rent + that 50 dollars + whatever expenses)/the number of sales you made.
Whoever decidedto make thisvideo it is nice🎉🎉🎉🎉🎉
Very nice
Thank u!
You're more than welcome, thanks for dropping by and taking the time to say thanks! :)
we need such videos, please!!!!!
Doing my best to keep them coming :)
Thanks sir it really helped 👍😊
Always happy to hear (well, see) this, thank you :)
good explaination thanks
Thanks a lot for the kind words :)
That's great thank you 🙂🙂
You're more than welcome Neelam :)
Very helpful
Glad you found it helpful, thanks a lot for the kind words :)
man you are goated ❤❤
:)
Sir alii watched it...
so the stronger economy of scale between each month, would be month 2 because the per plane cost is less than month 1?
Yep! In essence, his revenue went up dramatically (500 orders as opposed to just 10 for month #1), whereas his fixed costs (well, cost in our case, just the rent) stayed the same.
where can i buy his paper plane. looks dope af
John appreciates the kind words :D
how did you work out the per plane cost?
It depends on the month you're referring to. As far as month #1 is concerned, he made 10 planes and had $1,050 in costs: the $1,000 rent cost and $50 in variable cost. As such, he had to spend $105 per plane. As far as month two is concerned, he got a lot more orders and as such, his per plane costs went down a lot. More specifically, he made 500 planes and invested $3,500: $1,000 to pay his rent and $2,500 in variable costs. A much lower $7 per plane cost this time around :)
@@OneMinuteEconomics thank you .
how are you getting the per plane cost? loved the video by the way!
When he sells 10 planes, his cost is $1000 rent and $5 per plane ($50) = $1050. If u divide his total cost ($1050) by 10 planes sold, you get a cost of $105 per plane...or a loss of $85 per plane sold.
@@ac777 thanks!
thanks bro
You're more than welcome, glad you found the video entertaining :)
Nice man tnx
You are more than welcome :)
Hi,
How did you get per plane cost?
Answered in a previous comment :)
exquisite
:)
how could we distinguish the per-plane cost?
We start by asking ourselves what the total costs were (not just variable costs) and divide that by the number of planes he produced :)
@@OneMinuteEconomics oh okay thank you! To recap that, it would be the Rent amount (+) Variable cost (÷) The 10 planes he has to make to sell to his buyers
So it would be $1,000 Rent cost (+) $50 Variable cost (÷) 10 (which is the number of planes ordered by his customers)
I love you.
Thnks
Sorry, wrong calculation at 1:09 - The profit is $7,500 ($10,000 - ($1,000 + $2,500). Not $6,500 as mentioned in the video at this time counter. However, nice effort.
How do you get the per-plane cost?
No idea, since I'm not in the wooden airplane business haha. Kidding aside, I simply went with $5 per plane for the sake of our example :)
It is the cost per unit equation. Add together the fixed costs and variable costs then divide by the number of units you produced in that period of time.
How did you get per plane cost $105
The main reason is represented by the fact that he only sold 10 planes during his first month. He generated $200 but had to pay $1,050 to make those planes: $1,000 to cover his rent and $50 in variable costs. As such, he loses money because his per-plane cost is a whopping $105 ($1,050 divided by 10) :)
Is higher labour productivity because economies of scale decrease cost per unit and so they can you this money to increase labour productivity like by more resources or equipment?
Labor productivity is influenced by a wide range of factors, from education to equipment. To answer your question directly, yes, economies of scale can most definitely work in your favor from that perspective :)
@@OneMinuteEconomics thank you for the info and the fast feedback
But... why is it called an "Economy of Scale" - what's the etymology?
I know it's not important, but i was hoping to learn that... Guess I'll just wiki it.
so why is it called that?
It’s because you literally create a scaled economy just privately. EoS only become EoS when the business reaches a certain size or does more. So like, in the same way one person is just simply buying power of one person, many people make up an economy, an economy of scale is created when you have many of a product, instead of just one.
I hope you Understand? Tried my best lol
how can you calculate his per plane cost?
Please check out my reply to one of the earlier comments, it was mentioned there :)
@@OneMinuteEconomics Thank you! I did see it! Your video is very easy to understand
Thanks a lot :)
so what is economies of scale then?
What "is" anything, really? :P On a serious note, as explained at the beginning of the video, it's essentially a term used to describe situations where the growth of your business enables you to produce at lower costs per unit. For example, if you build wooden airplanes and are a small business with a low number of sales, you're hardly in a good position to secure bulk deals on wooden materials. Once that business has grown and you sell tens of thousands of wooden airplanes per month, perhaps more, your bargaining power goes up accordingly and enables you to for example buy materials at lower costs. The effect? You spend less per plane you produce than in the early days :)
This concept was covered in my textbook under the topic of monopolies. If this is a type of monopoly, what would cause a normal buisness's costs to go up as production increases past a certain point?
Economies of scale CAN contribute to monopoly situations, wherein one company keeps growing to such a degree that smaller players don't stand a chance. But that does not "have" to be the case. With it being both possible and common for multiple competitors to co-exist, with economies of scale working in favor of each company.
HOWEVER, do keep in mind that some costs can and do go up as companies grow. For example, you can easily manage a team of let's say 5 people and handle everything from task delegation to the hiring process. But if said company grows to 100+ employees, you all of a sudden need categories of employees you did not have before. A human resource specialist here, an additional manager there and it all ads up :)
ok
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Why do he sound like Ian Somerhalder
No idea who that is but... thanks? I think... hope :)
@@OneMinuteEconomics you're most welcome 😌 well he's an actor. The vampire diaries.
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