Economies of Scale in a Toaster Oven Plant

A small plant, S, turns out 30 toaster ovens at an average cost of $30 each. A medium plant, M, makes 50 at $20 each. A large plant, L, makes 150 at $10 each. Spreading the fixed costs of the building and the machinery over more units is what drives the average down.

Past 150 units the fall stops. Plant V makes 200 units and still pays $10 each, so there is nothing more to gain from size alone. This is why intra-industry trade between similar countries pays. A plant big enough to reach the bottom of this curve may be larger than one country's market, and trade lets it sell abroad while its customers keep a choice of suppliers. The slider reads the curve at any output.