Economies of scale

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Economies of scale are factors that cause the average price of something to fall as the amount produced increases. A farmer growing 10 acres of wheat and a farmer growing 100 acres of wheat both buy a combine, the larger farmer can spread out the cost of the combine over more wheat, bringing down the cost of production.

This way of thinking about efficiency relies on specialization, rather than diversification, and can often come at the expense of economies of scope - which are based on the diversity and variety of an organization. The benefits of economies of scale are also limited by diseconomies of scale, in which larger companies' costs of production are actually higher than smaller companies. Even when they depress costs, economies of scale might lead to lower profits for a farmer, since lower costs often come together with lower quality, leading to drastically lower potential sale prices, and because selling a huge quantity of a commodity usually requires one or more "middlemen".

In agribusiness, economies of scale are the cornerstone of the agro-industrial model of farming. In this model, farmers focus on a small number of farming activities and make huge investments (often borrowing large amounts of capital) in specialized equipment and infrastructure to support their chosen specialty. To justify the high expenses and repay the loans, farmers must often grow their operations to the absolute limit of what their new infrastructure can support, frequently leading to the need to borrow new money to make new investments in ever larger equipment.

Since the early 1930's North American farm policy has been designed to force farmers to follow this philosophy by specializing on a narrow range of agriculture and increasing the size of their operations.

The highly leveraged position of the "scaled up" farmer

The Amish example

Re-imagining infrastructure and equipment costs

  • Useing older equipment for major savings (and marrying that with new, cheaper technologies)
  • Creating a market for specialized farm service providers who make the investments in machinery but serve several farms
  • Calculating total costs of a product, including middle-man-markup, transportation and distribution costs and retailer's cut, as opposed to commodity prices

Diseconomies of scale in agriculture