Thursday, April 15, 2010

Econ 101: Economies of Scale - Redux

After my post this morning, Beervana blogger Jeff Alworth sends along this new picture and writes: "Each one of those tanks at Widmer is 1500 barrels (46,500 gallons)--the annual production of a big brewpub.  There are six in that room and one of the brewers joked, "the biggest six-pack in Portland.""

Here is another aspect of economies of scale: the cube-square law.  According to Galileo (via Wikipedia) this law states: "When an object undergoes a proportional increase in size, its new volume is proportional to the cube of the multiplier and its new surface area is proportional to the square of the multiplier."  So if you double the size of a tank in a brewery, the cost of the materials to make it (stainless steel) increases fourfold but the volume increases eightfold.  So if you have the production to support it, you get double the bang for your buck in tankage - thus the average cost per ounce of beer decreases (all else equal - like just as easy to clean and maintain as smaller tanks).  Now you know.

And for my students - after these two posts, I have now made attending my class today almost entirely redundant, but as it already happened you cannot act on this knowledge - so my ego is safe for another day.  


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