September 4, 2019

The Economies of Scale is the Future

BGC Parks by IPR.

There is a concept in economics that is very relevant today, this concept might be one of the solutions to poverty, the concept is known as the economies of scale. Economies of scale pertain to production of goods (products) at the maximum level – as production increases, average cost of producing a product decreases. Using hypothetical example, if you have a agriculture land that is capable of producing 10,000 tomatoes and you are only producing 1,000 tomatoes (at a price of PHP 1 each which is equivalent to PHP 1,000 income) then you are not applying economies of scale, but if you maximize the use of land and harvested 10,000 tomatoes (with the same number of laborer) then you are applying economies of scale. Assuming that the business is better-off with PHP 1,000 income, the 10,000 produced tomatoes could be sold for only PHP 0.10 centavo (PHP 1,000/10,000 tomatoes) which is 90% lower than previous price of PHP 1 if the business chose to produce 1,000 tomatoes only (take note that in a competitive market, consumers will most likely choose products that are affordable). The said example is a win-win situation between business and consumer; the business was able to realize the target PHP 1,000 income and the consumer was able to buy tomatoes at a very low price. The implication of this is that, economies of scale could be one of the answers to poverty; by lowering the price of goods and services using mass production (or maximum production technique) with the help of new technologies, purchasing power of people could be enhanced. 

If you imagine the application of economies of scale, its use could be universal, and could be applied to almost everything. But first, if we want to solve poverty we have to apply this concept first in the basic products - such as food, shelter, clothing, energy, transportation, and health products. Imagine if we can reduce the cost of all this products to almost zero, because of the efficiency in production that would be brought by technology, then, that would be the future that everyone could envision. I am sounding idealistic here, but if we want a better world that is inclusive, countries should start to re-think the concept of economies of scale. 

But before anything else, how can we encourage businesses to produce products and sell it at a very low price? Application of economies of scale is not new, if you look in the internet and go to shopping websites, you would notice products from China that are sold at a very competitive low price, so low that it is almost free (e.g. mini led lights for only PHP 10 – at this price the poorest of the poor can afford to own a light). I think this is one of the secrets of success of China; they can produce plenty of goods and sell it at a very low price. In the case of developing countries like Philippines, taking energy as the case; if we encourage investments in energy plants, which would increase the supply of energy to the maximum level, then time will come that price of energy will almost be free. The almost free energy will have a chain effect that will result to lower price of other goods and services (lower transportation cost, lower manufacturing cost, lower maintenance cost and the likes). The economies of scale revolution fueled by technological advancement can start from different industries (agriculture, manufacturing, energy, transportation and etc.); if you grasp the idea, this revolution could be phenomenal that life will almost be free.

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