Nib asked, and Nib — askNib's tutor — drew the answer live at a whiteboard. This is the spoken transcript; enable JavaScript to watch it drawn.
how do economies of scale work
In 1908 the Ford Model T Runabout cost eight hundred twenty-five dollars. By October 1924 it was as low as two hundred sixty. Same car. What changed?
Part of the answer is the moving assembly line. It cut the time to assemble one chassis from twelve hours eight minutes to one hour thirty-three.
Here is the arithmetic. A factory's fixed cost is paid whether it builds a few cars or many. Spread over more cars, each car carries less of it.
But growth is not free forever. A bigger firm needs more layers of managers, more meetings, more delays. That extra cost per car creeps upward.
Add the two and you get the U-shaped long-run average cost curve. Its bottom is the minimum efficient scale. Past it come diseconomies of scale.
So here is the whole idea. Growing lowers the cost of each car, for a while. Ford rode the falling side; past the bottom, size itself becomes the cost.
Bigger gets cheaper per unit only up to a point, and finding that point is half of running a business.