An Economics Skills and Activities Workbook

Activity 2.5 - How can they sell a PC Keyboard for $15?

The PC industry typifies the economies of scale rule. The quantities in which most PC components are produced are so awesome that the final price to the user drops far below the off-the-shelf price of the individual chips, connectors and other hardware.

The large number of units produced mean that the Research and Development average cost is very low - an extra thousand dollars spent on design costs is not terribly important in the greater scheme of things, indeed if it can save fifty cents on production costs it is well worthwhile. In contrast, some of our clients are Start-up companies (where the volumes are initially quite low), and many are companies targeting Niche markets. We also design circuitry for companies producing many thousands of units, the point is that different rules apply dependent on the expected volume of production. It would be difficult to push the cost of producing an ordinary 4 function pocket calculator below $50 if the production quantity was small - say 200 pcs in each run. That is assuming that there was a suitable ready made plastic case available. We can buy a calculator for $5 (or less) because of the quantity in which they are produced. In many cases the parts that are used in high volume products are simply unavailable in small volumes, as they are custom produced for each manufacturer. Good examples would be the plastic case used in a calculator, the LCD display, and the calculator IC (integrated circuit or chip) itself. The manufacturer in a high volume market can also reduce the size of his product substantially, through spending a little more on design, the use of custom parts, and sometimes through more sophisticated manufacturing techniques. A good example is the chip-on-board construction used in a calculator, where the IC dice are attached directly to the PCB, bondwires are connected, and then the die is covered in a black epoxy blob for environmental protection. Companies selling into existing Niche Markets can usually estimate how many units they will sell to their customers, at least to the order of magnitude required to estimate production costs.

Source: http://www.airborn.com.au/method/volume.html

1. What is the average cost and total cost of producing 1000 calculators in a day?

2. Why is the average cost of producing a small number of calculators so high?

3. What is the minimum average cost the firm can produce at?

4. Through what output levels is the firm experiencing increasing returns?

5. Through what output levels are the firm experiencing constant returns?

6. What might prevent the average costs falling further?

7. Through what output levels is the firm experiencing decreasing returns?

8. What could cause diseconomies of scale for the PC industry?

9. What internal economies of scale exist for the PC industry?

10. What could be some external economies of scale for the PC industry?

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