Economies of Scale

Economies of scale is a fundamental concept of economics study. It means when more of a product is produced, the unit cost will come down. This practice will result in higher employment and consumption. No other country takes this idea as seriously as the United States. So besides more cars, sodas and potato chips, US companies produce more cigarettes, drugs, guns and other weapons too. What to do with such big quantities? They must push sales in order to continue producing at lower costs. Does this really mean a higher standard of living for the people? Are there any other hidden costs to consider?

In fact, economies of scale have limits. If you start from zero production, the unit cost will come down dramatically. However, it will start to taper off when production exceeds a certain quantity where other costs begin to gain significance. A point will be reached where more production does not pay. Consider junk food, industrial pollution, consumer wastes, drug overdose, weapons in the wrong hands, and so on.

Besides material production, the same limits apply to finance. Excessive easy lending has resulted in the housing bubble that burst in late 2008 and precipitated the Great Recession. Aggressive sales push by banks has generated a huge consumer loan that adds to the US national debt. The explosion of student loans has turned millions of young Americans into debtors before they even find a job. Consumer loans encourage people to spend their future incomes to keep the economy going. If excessive, they divert valuable resources from investments that carry the real potential to generate future incomes.

Life is complicated unless we ignore those things we don’t like to see or hear. Every good thing has a limit beyond which the cost exceeds the benefit in going further. We must consider where the limit lies by considering the hidden cost besides the production cost, else we will have to deal with the bad consequences of too much production.

This entry was posted in 21st Century, Economics/Politics, Environment, Inspiration. Bookmark the permalink.

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