Economies of scale

This is an important concept and one of the major challenges faced by emerging farmers.

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You may have heard the concept “economies of scale”. It’s something many farmers struggle with, and it’s one of the major challenges faced by emerging farmers. But what is it exactly?

Economies of scale is about increasing profits by producing more of a product. Let’s say it costs the same to produce 1 000 units as it does to produce 500. So you did your calculations and found that your labour costs would be the same and that if you use your raw materials efficiently it would cost the same to produce 500 units as it would to produce 1 000 units. If that’s the case, then economies of scale mean you should try to produce 1 000 units.

Producing more could also see your input cost being reduced. For example, this might be R20/unit if you’re producing 500 units. That’s a total cost of R10 000 (R20 x 500). And if you sell at R45 each, that will give you R22 500. But you’ll have to subtract that R10 000 (because it is what you put in to produce the units), which leaves you with R12 500 profit.

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Source: Investopedia’s Guide To Wall Speak, edited by Jack Guinan (McGraw-Hill).