in our second episode we'll be talking about economics of scale and how this principle defines the cost of your other services stay tuned for the second episode let's start with learning objectives the goal of this episode is to help you to understand the principles of economies of scale and how this principle explains the cost of other services and to explain that principle I will use a simplified example using a delivery company that delivers a packages to its customers and you start your own company you usually start at very small scale for instance by purchasing free
delivery trucks when you do that you will need to first of all buy them and since the company is very small and you're just starting you most likely make individual purchase for each of those cars let's imagine you paid $10,000 for each regardless if those cars are used or not you will need to spend some money on the maintenance of those cars because your company is very small you cannot make any contracts you will need to pay individually for each repair each maintenance that you need to perform on your own cars each car of course
needs to be insured so that's additional cost that you need to make individually and as you can imagine there will be plenty of other costs that you will need to incur when running your own company based on the cost that you need to incur and the amount of the customers that you have you will need to calculate the price of your service in order to stay profitable and stay on the market what price is called price per unit so at price that you need to charge for the delivery of your package or your company to
stay profitable - let me explain to you what happens if your company grows in size if your scale will go from free cars for instance 300 because your company is already big you might be able to buy your house in bulk on the dealership at the discounted price instead of buying them for 10,000 maybe buy them for nine again for maintenance you will be able to sign some contract with some car repair shop again lowering the price of the maintenance required for your cars same goes for insurance because you can buy insurance in bulk and
if you have some shared services maybe hire some additional stuff to maintain your company you will be also able to reduce price per car that is required to maintain your company because the scale of your company is much greater than before you are now able to handle many more customers without sacrificing the quality of your service allowing you to lower the price per unit do you get more benefits internally by having large company you are more efficient operationally and you can share those benefits with your customers by reducing the price per unit in this case
this will also make your company much more competitive on the market making sure that you grow even further so to quickly summarize as your company grows your price per unit lowers because companies aren't getting more efficient at what they're doing to have a small company your price per unit will be quite high if you have medium company your price per unit will be better but still at quite medium range and if you have very large companies your price will be quite low and very competitive on the market and this principle perfectly describes what is happening
with the cloud as the cloud grows and it has more customers the price of their services will go down because big companies like Microsoft will get more efficient at what they do in case of Microsoft it will get more efficient on building new data centers getting better prices for the hardware there of course will be Hardware advancements which will again lower the price and when this happens and my crystal wants to stay competitive the prices of the services that it offers will also go down and that's really it this is how economies of scale work
and how they drive the cost of your other services or this episode again go to my website - episode 2 check out the study cheat sheet and maybe take a practice test and that's it for this episode thank you guys for watching if you like what I do support the channel by subscribing liking and commenting or showing this to your friends if you want to see the next episode simply follow the playlist or hit the icon on the side and see you there [Music]
