When Economies of Scale have been exhausted.

The Economist Free Exchange looked at how economies of scale for some firms have started to run out. When the average cost curve slopes downwards it means that average costs are decreasing as output increases. Whenever this happens the firm is experiencing economies of scale. If on the other hand the average costs are increasing as output increases the firm is experiencing diseconomies of scale – see graph below A-C economies of scale and C-D diseconomies of scale.

Container ship are a good example of economies of scale.
* 1950’s – they could carry 480 twnety-foot equivalent (TEU) containers
* 2006 – they could carrry 15,000 TEUs
* By 2013 – they will be able to carry 18,000 TEUs

As shipping costs per container keeps coming down container ships are expected to keep getting bigger.

Diseconomies – Skyscrapers and European Farmers

However, the idea of building something bigger will generate increasing economies of scale is not always the case. Think about a skyscraper, as you start to get above a certain height the cost per floor level starts to increase as there are structural aspects of the buidling that must be addressed and also with the core of the building getting larger as teh the building gets taller the amount of useable office space get reduced. Therefore if developers were looking at cost structures for buildings they would probably build mid-size buildings.

Many of the eastern bloc countries in the European Union are economic basket cases, still struggling to pick themselves up after the fall of communism in the early 1990’s, and this worries exporters who fear the big Western European economies maybe dragged down by their influence. The majority of their economies are weighed down by inefficient agricultural sectors inherited from the communist era and massive diseconomies of scale. If we look at Poland’s milk production, it is equivalent to New Zealand’s however this is spread over 500,000 farms and processed by 414 processing applications (US Department of Agriculture statistics). In New Zealand there are approximately 12,000 dairy farms.

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