Thursday, September 13, 2012

Economies of Scale in Chinese Pig Farms

The New York Times reported that Chinese pig farms are getting larger to take advantage of the economies of scale in pork production.  Remember economies of scale occurs when a firm increases its production and its per unit total costs (average total costs) decreases.

You may also note that as pork producers become larger they are more able to withstand price fluctuations (since they are making a greater per unit profit - from lower average total costs).  The good news is that small pork producers shut-down when prices fall, which will not happen as dramatically with larger pork producers.  The bad news is that as pork production becomes more concentrated, pork prices will rise, which according to the article is exactly what the increase in pork producers is trying to avert.

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