Economies of scale can be described as the phenomenon, where the more you produce (“scale”), the lower the average cost per product. For entrepreneurs, economies of scale are often crucial in their strategy. It forces them to grow faster than the competition, which is the reason why so many startups remain unprofitable for many years.
- When you produce a product or a service,…you need to know what your costs are.…Economies of scale can be described as the phenomenon…where the more you produce (scale),…the lower the average cost per product.…To illustrate economies of scale,…we can start with a print shop.…I love this example because I worked in a print shop…during the summer when I was a high school student.…It allowed me to earn some money…and to spend time experimenting…with the posters for our discotheque.…
The print shop had one of the first…Apple Macintosh computers where you could…change the fonts and rotate the words.…They ran Aldus PageMaker on a 512k Mac…with a nine-inch screen.…I don't wanna sound nostalgic here,…but these were the good days of desktop publishing.…Every laser printout was a miracle.…The print shop carried a fixed cost of 250,000 per year.…The variable cost for each print job is 150 dollars.…
Now, if the company would produce…only one print job per year,…it would cost 250,150 dollars,…because it had to carry the full fixed cost.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action