Chapter 20: Problem 28

Each of the following provides an example of economies of scale except __________ ( LO7) a) the computer software industry b) the pharmaceutical industry c) Adam Smith's pin factory d) movie and TV production e) the services of psychiatrists, personal trainers, barbers, and beauticians

Short Answer

Expert verified

The correct answer is e) the services of psychiatrists, personal trainers, barbers, and beauticians, as they are less amenable to economies of scale due to individualized and specialized professionals working directly with clients, and the amount of attention each professional can give does not change or decrease as the number of clients increases.

Step by step solution

Understand the concept of economies of scale

Economies of scale occur when the cost of producing one unit of a product decreases as the quantity produced increases. This is typically because fixed costs (like factory setup, equipment, and so on) are distributed across a larger number of units produced.

Analyze each example in relation to economies of scale

In each of the options provided, we need to determine whether they adhere to the concept of economies of scale, i.e., they should have a decreasing per-unit cost as production increases. a) Computer software industry: This industry has high upfront costs (such as development) and low production costs, meaning that the additional units produced require minimal additional expenses. This results in economies of scale. b) Pharmaceutical industry: This industry similarly has high upfront costs for R&D and clinical trials, followed by low production costs. Like the software industry, this results in economies of scale. c) Adam Smith's pin factory: In his classic example, Adam Smith showed how specialized labor in an industrial setting could lead to increased efficiency and lowered production costs, which is an example of economies of scale. d) Movie and TV production: There are high upfront costs for equipment, location, and talent, but each subsequent airing or screening incurs minimal costs, which manifests in economies of scale. e) Services of psychiatrists, personal trainers, barbers, and beauticians: Unlike the previous examples, these services are less amenable to economies of scale. The production of these services is based on individualized and specialized professionals working directly with clients. As the number of clients increases, the amount of individual attention each professional can give to their clients does not change or decrease. Therefore, this example does not follow the concept of economies of scale.

Identify the exception to economies of scale

From the analysis of the different industries provided, we can determine that the only example that does not exhibit economies of scale is: e) the services of psychiatrists, personal trainers, barbers, and beauticians

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Educational Economics

When discussing educational economics, we are essentially referring to the principles and applications of economic theory within the educational sector. This includes understanding how education markets operate, the allocation of resources and funding, the assessment of educational policies, and the economic impact of education on both individuals and societies as a whole.

For example, as educational institutions expand—be they schools, colleges, or online learning platforms—they may experience economies of scale. This can occur when the cost per student decreases as institutions grow and are able to spread their fixed costs, like infrastructure and administrative expenses, over a larger student base. Additionally, advancements in technology have facilitated these economies of scale by enabling educational content to be delivered digitally, reducing the marginal costs of enrolling additional students.

Understanding these economic principles helps educators, policymakers, and students alike to navigate the financial complexities of the education system and work towards more cost-effective and impactful learning experiences.

Cost Analysis in Production

Cost analysis in production is a critical component of managing a successful business. It involves assessing all the costs involved in the production process, from raw materials and labor to overheads and distribution. The aim is to identify the optimal production level where costs are minimized and profits are maximized.

To understand this, we must differentiate between fixed and variable costs. Fixed costs, such as rent and salaries, do not change with the level of production. In contrast, variable costs, such as materials and energy usage, fluctuate with production volumes. As volume increases, fixed costs are spread over more units, thereby reducing the cost per unit—a concept central to economies of scale.

Importance of Marginal Cost

Furthermore, businesses must consider the marginal cost—the cost of producing one additional unit. When the marginal cost is below the average total cost, economies of scale are present, allowing a business to expand production profitably.

Adam Smith's Pin Factory

Adam Smith's pin factory example is a classical illustration of economies of scale and the benefits of labor division. In 'The Wealth of Nations,' Smith described how the production process of making pins was broken down into distinct tasks. Each worker specialized in one task, such as straightening the pin wire or sharpening the point, which drastically increased total output.

This division of labor meant that, rather than one person producing only a handful of pins per day, a group of specialized workers could produce thousands. This not only increased efficiency and production but also significantly reduced the cost per pin as the fixed costs associated with the factory, equipment, and training were spread over a much larger quantity of pins.

Specialization Leads to Expertise

Moreover, specialization allowed workers to become highly skilled in their respective tasks, leading to fewer mistakes and higher quality products. This historical example provides a clear understanding of how economies of scale can be achieved by reducing time wastage and increasing worker expertise.