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Long run production and costs

21 December, 2015 - 11:38

The snowboard manufacturer we portray produces a relatively low level of output; in reality, millions of snowboards are produced each year in the global market. Black Diamond Snowboards may have hoped to get a start by going after a local market—the “free-ride” teenagers at Mont Sainte Anne in Quebec or at Fernie in British Columbia. If this business takes off, the owner must increase production, take the business out of his garage and set up a larger-scale operation. But how will this affect his cost structure? Will he be able to produce boards at a lower cost than when he was producing a very limited number of boards each season? Real-world experience would indicate yes.

Production costs almost always decline when the scale of the operation initially increases. We refer to this phenomenon simply as economies of scale. There are several reasons why scale economies are encountered. One is that production flows can be organized in a more efficient manner when more is being produced. Another is that the opportunity to make greater use of task specialization presents itself; for example, Black Diamond Snowboards may be able to subdivide tasks within the laminating and packaging stations. If scale economies do define the real world, then a bigger plant—one that is geared to produce a higher level of output—should have an average total cost curve that is “lower” than the cost curve corresponding to the smaller scale of operation we considered in the example above.