Wednesday, April 14, 2010

Econ 101: Economies of Scale

Over at the Beervana Blog, Jeff Alworth notes (and photos) a new set of tanks being delivered to Coalition Brewery near his house.  To the economist in me this picture says one thing: economies of scale.

Economies of scale simply refer to any productive activity whose average costs decrease with output.  In many cases this is due to large fixed costs - those costs that do not depend on the quantity of the output.  Take this brewhouse for example: the cost of these tanks will be the same if they brew no beer or if they brew to capacity.  Alex at Upright, for example, has a beautiful brewhouse but is only brewing at about 60% capacity - if memory serves.  So if Upright brews more, the average cost of the beer they brew will go down - the fixed cost will be spread across more beer.  Since breweries require a lot of large scale equipment, it is an industry prone to economies of scale. There are other sources of economies of scale that are relevant to the beer industry as well: bottling, distributing and marketing to name three.

The implications of economies of scale have been discussed here at length, but the main one is a tendency for such an industry to be prone to concentration.  It is no accident that the big macrobrewers have become bigger and bigger through acquisitions and mergers.  [I have noted in a previous post how the fact that craft brew is an artisanal product and an experience good creates a countervailing force for small scale brewers to exploit]

The good news for Portland and Oregon craft brewers is that, like these internal economies of scale (that depend on the firm's activity alone), external economies of scale exist.  For example, with a lot of local craft brewers there is more demand for ingredients.  This high demand allows farmers and other input providers to achieve their own economies of scale, promotes competition and allows for efficiency in distribution of inputs.  So it is likely that inputs costs are low in Portland and Oregon not just because of proximity to the growers but because of all the brewing that goes on in Oregon.  [There is also a demand side effect, but that is a topic for another day]

So this external economies of scale is a pretty groovy story: the more local craft brewers brew, the lower are the costs for their fellow brewers.  Once again we see that competitors can also help each other out - even unintentionally.  For an industry that is remarkable for its sense of community and fellowship, this shows that they are not just deluded hippies - they are also savvy businesspeople.


oakleyses said...

ugg outlet, giuseppe zanotti, birkin bag, iphone 6 case, north face outlet, uggs on sale, soccer jerseys, marc jacobs outlet, canada goose outlet, jimmy choo shoes, timberland shoes, asics shoes, ugg, soccer shoes, chi flat iron, mont blanc pens, lululemon outlet, ghd, moncler, p90x workout, reebok outlet, ugg soldes, uggs outlet, ferragamo shoes, celine handbags, ugg boots, moncler outlet, instyler ionic styler, insanity workout, beats headphones, mcm handbags, canada goose, new balance outlet, canada goose pas cher, north face jackets, moncler, herve leger, rolex watches, canada goose uk, canada goose outlet, wedding dresses, nfl jerseys, nike air max, hollister clothing, baseball bats, babyliss pro, valentino shoes, bottega veneta, moncler, canada goose outlet

Anonymous said...

nike trainers
christian louboutin outlet
jordans for sale
air jordan pas cher
adidas originals
nike air max
coach outlet store online
michael kors handbags
christian louboutin shoes
louis vuitton handbags
cheap ray ban sunglasses
nike air max
jordan 4 toro
tods shoes
louis vuitton outlet
celine bags
nike free run
beats wireless headphones
ray-ban sunglasses
tory burch outlet
coach outlet store online clearances
longchamp bags
ray ban sunglasses outlet
coach factory outlet
hollister clothing
ray ban
polo ralph shirts
coach factory outlet
coach outlet
nike uk
coach outlet
louis vuitton
oakley sunglasses
coach outlet store online
ray ban sunglasses
jordan 11s
jordan concords
burberry outlet
oakley sunglasses
jordan shoes

Unknown said...

the north face outlet
oakley sunglasses outlet
reebok shoes
nike air max
michael kors handbags
jordans for sale
mcm handbags
red sole shoes
michael kors purses on sale
cheap nike shoes
north face denali jacket
cheap uggs
tiffany and co
michael kors handbags
louboutin shoes
nike air max
jordan 6
mbt shoes
clarks flip flops
salomon shoes
under armour shoes
louboutin shoes
coach purse
jordan shoes official site
nike outlet store
kate spade clearance
new balance 574
jordans for sale
kate spade
cheap ray ban sunglasses
rolex watches for men
micheal kors
clarks shoes
lebron james sneakers
michael kors outlet
ugg boots on sale
oakley store
nike outlet
north face outlet
michael kors handbags clearance

Alexmohom said...

We are proud to say that all our products are not displayed online without going through an intensive quality assurance process.
Buy clonezapam powder online
Buy weed online
Buy cocaine online
Buy bio cocaine online
actavis-promethazine-codeine for sale online
western saddles for sale online
Buy weed online
Buy weed online
Buy cocaine online