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A scientific economic estimation

Posted by: Ekkehard Augustin - Sun Dec 05, 2004 6:15 pm
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A scientific economic estimation 
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Post    Posted on: Mon May 30, 2005 3:44 am
Hi Ekkehard,

In all that long post I still didn't see an answer to the question, what past industry reduced costs by 100 or more times by simply increasing production volume. You don’t need months of research or hundreds of pages of documents. Just a couple of bottom line numbers. SawSS1Jun21 found documents showing Ford costs dropping from $1000 to $300. That is all the detail I want.

Whitehorn has made a very believable prediction based on a real business plan, $50,000 in the 5th year of operation. What is your prediction? In 5 years we can meet here again and see which prediction is closer to reality.


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Post    Posted on: Mon May 30, 2005 7:20 am
Hello, Peter,

you wrote

Quote:
You don’t need months of research or hundreds of pages of documents. Just a couple of bottom line numbers. SawSS1Jun21 found documents showing Ford costs dropping from $1000 to $300. That is all the detail I want.


What are we talking about?

Before SawSS1Jun21 answer to me it was a talk about a scientific estimation and especially about economies of scale. And in concrete about the question if economies of scale can reduce costs by afactor of 1,000 which you don't believe. This talk can't be done by a couple of bottom line numbers - simply because the bottom line numbers don't say anything about what caused these numbers.

The documents SawSS1Jun21 found refer especially to the car market and he used the documents in an answer to my post saying that the Otto-motor is an example of a product in the production of which economies of scale caused cost reductions by a factor of 1,000.

I'll read the documents again SawSS1Jun21 quoted and then say something about them.

I especillay have been speaking of 100 years since which the Otto-motor is used in cars - which menas that there was no new motor-technology at the markets. The only different technology has been the Wankel-motor. And so since 100 years holes etc. are drilled into motor-blocks, screws are driven into it and other things a welded to them. And I said that during these 100 years economies of scale are achieved reducing costs by a factor of 1,000.

And I explained why numbers of units of money can't be used that easyly - don't you believe those explanations? Then neither the answer to you nor some of your own answers to me don't make any sense simply because we don't have a common base of talking about it.

Regarding cars I really have to invest time which I don't have availabl. Ford isn't the only car producer - others may have achieved higher reductions. This alone already makes necessary more detailed seraches for a lot of numbers: The whole market has to be searched for economies of scale but not one company only.

So please - what are we talking about? What do you have in mind?

Do you have in mind the question if economies of scale can reduce costs by the factor of 1,000 in general? Then consequently you should have recognized the car market as an example only which also could be replaced by the PC market where 20 years ago 128 K had costs at which I can get 120G currently - factor of more than 1,000.

Or do you have in mind the question if economies of scale can reduce costs by the factor of 1,000 in the car market only and especially? Then I want to remind you that your were doubting the factor of 1,000 concerning the space vehicle market originally - and that it is required to not concentrate on the car market for this reason but to consider it to be one example only.

Peter, may it be that you are talking this way only because you can't bear to be wrong in your belief that economies of scale can't reduce costs by the factor of 1,000? Don't answer that question - I only want to illustrate what your behaviour is looking like currently to me: As you can read in my previous posts I can calculate at least one example providing the factor of 1,000.

Or have you secretly moved away from the question of the factor of 1,000?

Economies of scale occur in nearly each market, in nearly each production and so we mustn't concentrate on one market only if the discussion is about the question if economies of scale can reduce costs by a factor of 1,000.

I'll reread SawSS1Jun21 documents and do a little research for numbers - but all that really takes time. I don't know currently if SawSS1Jun21 is a student of engineering or an engineer dealing with such number at work but he seems to have time to look for such numbers but I myself don't have that time due to my own job - so you have to be patient, I'm sorry.

And I will send you the quotes of the science book - this discussion is impossible without that theory and without a common base which the theory provides.

Quote:
Whitehorn has made a very believable prediction based on a real business plan, $50,000 in the 5th year of operation. What is your prediction? In 5 years we can meet here again and see which prediction is closer to reality.


As I already said elsewhere - I don't predict such numbers without research, I don't have an opinion and I don't apply beliefs: nearly no Political Economist likes it to do so because it is inserious.



Dipl.-Volkswirt (bdvb) Augustin (Political Economist)

PS: Don't ignore what I wrote in my previous post - it's an element of my images and of my base. If you suppose to have arguments against then post them - and say too, if you don't have arguments.

EDIT: correction of my last issue about Political Economists done


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Post    Posted on: Mon May 30, 2005 2:49 pm
Ekkehard Augustin wrote:
Do you have in mind the question if economies of scale can reduce costs by the factor of 1,000 in general?
YES!

Ekkehard Augustin wrote:
Then consequently you should have recognized the car market as an example only which also could be replaced by the PC market.
NO! NO! NO! I have said this AGAIN and AGAIN and AGAIN! The ENTIRE electronics industry has benefited from the breakthrough technology of integrated circuits and CANNOT be used as an example of economies of scale. I have worked in the semiconductor industry for 25 years and I can tell you that most of the cost reductions are due to NEW TECHNOLOGY! The first jpeg in your E-mail states that all calculations are based on the "state of the art". I am here to tell you that the state of the art in semiconductors changes dramatically every year or two.


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Post    Posted on: Mon May 30, 2005 7:14 pm
Hello, Peter,

you wrote

Quote:
I have worked in the semiconductor industry for 25 years and I can tell you that most of the cost reductions are due to NEW TECHNOLOGY! The first jpeg in your E-mail states that all calculations are based on the "state of the art". I am here to tell you that the state of the art in semiconductors changes dramatically every year or two.


Obviously you have got my e-mail and read the jpgs I will add to this post at the end as text (I don't know if I will have success regarding the diagrams.

But there seems to be misunderstanding what is menat by "state of the art". I know what integrated circuits are and I know how disks and their drives work. Integrated circuits exist since 25 years ore more. The speed by which a computer works depends on the lenth of the circuits or electronical connections on the chip. The smaller the lengths the faster the computer.

Do you consider decreses of length as technologycal breatrhoughs even if they are still integrated circuits? If yes then you may be right under the view of engineers - but under the view of the book "Microeconomic theory" I scanned in the jpgs from a breakthrough regarding the lengths is no change in the "stae of the art". "State of the art" under the view of that science book is "integrated circuits" while the length of the connections within these ICs is scale... Tha fact that smaller lengths increase the speed of working - the frequency measured in Hz or Mhz or Ghz - are the economies - economies in time and time menas costs. Shorter lengths is larger scale seen from Economics because capacity in opertations per second has been increased.

Nearly each time when I read of increases in frequency or numbers of circuits per squarecentimeter or squaremilimeter I recognized it to be called "breakthruoghs and to call it so is justified because it seems to be very difficulkt to achieve shorter lengths. But it seemed to have been breakthruoghs in precision and exactness of the tools and machines required to create the integrated circuits rather than in the circuits themselves. I know too that in between the shortness of the electronical connections themselves are a problem because of tunneling effects and so on - but still all seem to be integrated circuits in two dimensions. Seen from engineering these will be breakthroughs - but seen from Economics they seem to be not: the state of the art, the technology are the integrated circuits - but not the length of electronical connections or number of them per millimeter. In Economics not the number is technology but the principle.

This tends to be a special topic because different views, different images of one and the same thing are involved - both justified and both being different sides of one Whole. Perhaps a good topic for the Off-Topic section - I would be intertested.

But I had been mentioning disks - harddisks especially and of their price. Each disk is organized by blocks, tracks and cylinders which contain the bits and bytes files and their records are consisting of. The number of bits and bytes conatined by the blocks, tracks and cylinders has increased extremly during the last two decades - but the prices I can or could buy them at have decreased for a long time. Currently I can get a 200 Gb disk at 100 Euros here in Hamburg - I am speaking of the disk ittself including the drive only now. 10 years ago I couldn't by 200 GB-disks here but only disks of 100 MB capacity at a price significantly above 100 Euro. And five to ten years earlier the capacity was smaller by the factor of 10 and the price higher yet. The size 128 KB is a number from the late eighties when harddisks wer luxury here in Germany: 120 GB are nearly a million times 128 KB while a price of 100 Euros = a little more than 200 Deutsche Mark is only a tenth of 2,000 Deutsche Mark. The diameter of the disks has decreased ´from 5.25 ichs to 3.5 inchs. I have been speaking of prices which I myself said is invalid - but if I subtract the costs of delivery and the proft margins and so on then the current price of 100 Euros goes down to 50 Euros costs or less while the former prices of 2,000 Deutsche Mark goe down to 1,500 or 1,000 Deutsche Mark only.

Alright - we both shouldn't forget that this may require a new thread in the Off-Topic section. But thsi really should be done and I would prefer if you intiate it because I can explain the economic view better then. It would be helpful if you ask questions about the economic view and the reasons for the different vew.

Alright now - I will terminate this post here, submit it and then add the quotes of the book by EDIT.



Dipl.-Volkswirt (bdvb) Augustin (Political Economist)

EDIT: Quoting Ferguson, Gould "Microeconomic theory":

TECHNOLOGY:

Quote:
124 Microeconomic theory
usually required as well. In particular, production normally requires various types of capital equipment (machines, tools, conveyors, buildings) and raw or processed materials. The theory of production consists of an analysis of hou, the businessman - given the "state of the art" or technulogy -combines various inputs to produce a stipulated output in an economically efficient manner.
Since the concept of production is clearer when applied to goods rather than services, our discussion will be restricted to production in agricultural and manufacturing industries. The student should be aware, nevertheless, that problems of resource allocation in service trades and government are not less serious because they are less discussed in this text. Indeed, as the population becomes more and more concentrated in the under 20 and over 65 age groups, the importance of services relative to goods increases. The principles of production studied here are as applicable to the output of services as to the output of goods, even though the application may be more difficult in the former case.
The same statement applies to the theory of cost. It is simpler to study a manufacturing business engaged in producing a specific good. Even then both costing and pricing are difficult matters - but not nearly so difficult as in service trades and government. Thus our discussion is restricted to producers of goods.
The theory of cost consists of an analysis of the costs of production -how costs are determined from a knowledge of the production func-tion, the effects of diminishing returns, cost in the short and long runs, the "four cost curves," and so on. But more importantly, it establishes the basis for studying the pricing practices of business firms, which occupies Part III.


LONG_RUN AVERAGE COSTS

This seems to require completion - and unfortunitely the integration of the diagram the text refers to failed. Please ask me for sending an e-mail whoever wnats to see the diagram.

Quote:
200 Microeconomic theory
leads to the least average cost for any given output. Thus as a planning device he regards the heavily shaded curve as his long-run average cost curve because this curve shows the least unit cost of producing each possible output. This curve is frequently called the "envelope curve."

7.4.b Long-Run Average Cost Curve
The illustration above is, as we said, highly simplified. An entrepre-neur is normally faced with a choice among quite a wide variety of plants. In Figure 7.4.2, six short-run average cost curves are shown: but


this is really far from enough. Many curves could be drawn between each of those shown. These six plants are only representative of the wide variety that could be constructed.
These many curves, just as the three in subsection 7.4.a, generate LAC as a planning device. Suppose an entrepreneur thinks the output associated with point A will be most profitable. He will build the plant represented by SAC, because it will enable him to produce this output"
at the least possible cost per unit. With the plant whose short-run average cost is given by SAC,, unit cost could be reduced by expanding output to the amount associated with point B, the minimum point of SAC,. If demand conditions were suddenly changed so this larger out-put were desirable, the entrepreneur could easily expand - and he would add to his profitability by reducing unit cost. Nevertheless, when setting his future plans the entrepreneur would decide to construct the plant


ECONOMIES OF SCALE

Unfortunitely the integration of the diagram the text refers to failed. Please ask me for sending an e-mail whoever wnats to see the diagram.

Quote:
208 Microeconomic theory
cost increases by proportionately more than output, so that average cost rises. Again the reason is clear: when e < 1, a given proportional in-crease in output requires inputs to be increased in greater proportion. At constant factor priccs, total cost expands by proportionately more than output and average cost increases.
These results may be summarized as the following
Relation: Long-run average cost decreases or increases according as there are increasing or decreasing returns to scale; this relation holds if,
and only if, factor prices are constant throughout.
7.6 SHAPE OF LAC
The short- and long-run average cost curves are alike in that each has been drawn with a U shape. The reasons for this shape, however, are quite different. SAC is U-shaped because the decline in average fixed cost is ultimately more than offset by the rise in average variable cost -the latter occurring because average product reaches a maximum and declines. But this has nothing at all to do with the curvature of LAC. Increasing or decreasing returns to scale in the production function and certain financial economies and diseconomies of scale are the factors governing the shape of LAC.
7.6.a Economies of Scale
As the size of plant and the scale of operation become larger, con-sidering expansion from the smallest possible plant, certain economies of scale are usually realized. That is, after adjusting all inputs optimally the unit cost of production can be reduced by increasing the size of plant.
Adam Smith gave one of the outstanding reasons for this: specializa-tion and division of labor. When the number of workers is expanded, fixed inputs remaining fixed, the opportunities for specialization and division of labor are rapidly exhausted. The marginal product curve rises, to be sure, but not for long. It very quickly reaches its maximum and declines thereafter. When workers and equipment are expanded together, however, very substantial gains may be reaped by division of jobs and the specialization of workers in one job or another.
Proficiency is gained by concentration of effort. If a plant is very small and employs only a small number of workers, each worker will usually have to perform several different jobs in the production process. In doing so he is likely to have to move about the plant, change tools,
7 / Theoros of cost 209
and so on. Not only are workers not highly specialized but a part of
their work time is consumed in moving about and changing tools. Thus important savings may be realized by expanding the scale of operation.
A larger plant with a larger work force may permit each worker to specialize in one job, gaining proficiency and obviating time-consuming interchanges of location and equipment. There naturally will be cor--
responding reductions in the unit cost of production.
Technological factors constitute a second force contributing to
economies of scale. If several different machines, each with a different rate of output, are required in a production process, the operation may have to be quite sizable to permit proper "meshing" of equipment. Suppose only two types of machines are required, one that produces and one that packages the product. If the first machine can produce 30,000 units per day and the second can package 45,000, output will have to be 90,000 units per day in order fully to utilize the capacity of each machine.
Another technological element is the fact that the cost of purchasing and installing larger machines is usually proportionately less than the cost of smaller machines. For example, a printing press that can run 200,000 papers per day does not cost 10 times as much as one that can run 20,000 per day - nor does it require 10 times as much building space, 10 times as many men to work it, and so forth. Again, expanding size tends to reduce the unit cost of production.
Thus two broad forces - specialization and division of labor and technological factors - enable producers to reduce unit cost by expand-ing the scale of operation.9 These forces give rise to the negatively sloped portion of the long-run average cost curve.
But why should it ever rise? After all possible economies of scale ave been realized, why does the curve not become horizontal?



7.6.b Diseconomies of Scale
The rising portion of LAC is usually attributed to "diseconomies of scale," which essentially means limitations to efficient management. Managing any business entails controlling and coordinating a wide va-riety of activities - production, transportation, finance, sales, etc. To
s This discussion of economies of scale has concentrated upon physical and technological forces. There are financial reasons for economies of scale as well. Large-scale purchasing of raw and processed materials may enable the buyer to obtain more favorable prices (quantity discounts). The same is frequently true of advertising.


perform these managerial functions efficiently, the manager must have accurate information; otherwise the essential decision making is done
in ignorance.
As the scale of plant expands beyond a certain point, top manage-nent necessary has to delegate responsibility and authority to lower echelon employees. Contact with the daily routine of operation tends to be lost and efficiency of operation to decline. Red tape and paper work expand; management is generally not as efficient. This increases the cost of performing the managerial function and, of course, the unit cost of production.
It is very difficult to determine just when diseconomies of scale set in and when they become strong enough to outweigh the economies of scale. In businesses where economies of scale are negligible, dis--


economies may soon become of paramount importance, causing LAC to turn up at a relatively small volume of output. Panel (a), Figure 7.6.1, shows a long-run average cost curve for a firm of this type. In other cases, economies of scale are extremely important. Even after the efficiency of management begins to decline, technological economies of scale may offset the diseconomies over a wide range of output. Thus the LAC curve may not turn upward until a very large volume of out-put is attained. This case, typified by the so-called natural monopolies, is illustrated in panel (b), Figure 7.6.1.
In many actual situations, however, neither of these extremes de-scribes the behavior of LAC. A very modest scale of operation may enable a firm to capture all of the economies of scale; however, dis-economies may not be incurred until the volume of output is very great. In this case, LAC would have a long horizontal section, as shown in
7 / Theoros of cost 211
panel (c). Many economists and businessmen feel that this type of LAC curve describes most production processes in the American economy.
7.7 LONG-RUN COST AND CHANGES IN FACTOR PRICE'°-"

Given the production function, costs change when factor prices change. In particular, total and average cost increase when a factor price increases, fall when a factor price declines. For simplicity, in this section we assume that only one factor price changes, and this change is repre-sented by an increase in factor price.


7.7.a Changes In Long-Run Average Cost

Long-run total cost of any given output must increase when the price of any factor increases. Factor substitution may occur, but the cost of producing the given output at the new prices and new set of inputs must be greater than the cost of producing the output at the old prices and at the old set of inputs. Were this not so, cost could have been reduced before the factor price change by using the new set of inputs (at the original factor prices). This reasoning holds for all output levels, so long-run average cost must increase after the factor price increases. In particular, the new level of minimum average cost must be higher than the old level of minimum average tost.


7.7.b Changes in Long-Run Marginal Cost and Minimum Average Total Cost

As explained in footnotes 10 and 11, the results of this section are based upon mathematical analysis that is not readily susceptible of verbal explanation. For that reason the following relations are stated without proof (but see Figure 7.7.1) .
Relation: When the price of a factor of production increases, long-run average cost increases. The new point of minimum long-run average cost corresponds to a greater output if the factor under consideration is normal
10 This section contains a verbal summary of the mathematical and economic results presented in C. E. Ferguson and Thomas R. Saving, "Long-Run Scale Adjust-ments of a Perfectly Competitive Firm and Industry,' American Economic Review,
vol. 59 (1969), pp. 774-83.
11 This section may be omitted without loss in continuity. It is based upon mathe-matical results contained in Ferguson and Saving, "Long-Run Scale Adjustments." Unfortunately, these results do not have a simple verbal or graphical interpretation.


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Post    Posted on: Mon May 30, 2005 8:26 pm
Ekkehard Augustin wrote:
Do you consider decreses of length as technologycal breatrhoughs even if they are still integrated circuits?
YES! Without the IC none of the cost reductions related to smaller and faster would have been possible. And the technology is still not mature. Rapid improvement in design, materials and manufacturing technology continues today. In a way, the IC is STILL being invented. And the same technology is being used to make disk drives, flat screen displays, lasers and other devices. But not space craft or aircraft or cars.

There is not yet any similar enabling technology in aerospace that would allow such dramatic performance improvements and cost reductions.


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Post    Posted on: Tue May 31, 2005 7:11 am
Hello, Peter,

your post reveals significant differences.

1. Seen under your engineering view decreases of lengths are technological breakthroughs - regardless of the fact that all the different lenghts are in ICs. In Engineering this will be right, correct and justified.

But this is the Financial Barriers section - the view of Economics is valid here. Under this view an IC is an IC regardless of the lenghts of electronic connections - and so the decrease of lengths is NOT a technological breakthrough. Economies of scale are a topic of Economics and so to discuss them the views of Economics have to be applied and not other views.

Result: In Economics the decreases in lengths aren't technological breakthroughs but increases in scale of ICs

2. Seen under your view of engineering design, materials and manufacturing continue to be improved.

I agree - but manufacturing isn't the IC itself and mustn't be identfied with it.

I can go to several shops in Hamburg and buy ICs integrated in CPUs or Motherboards - but if I buy them I don't buy the manufacturing, I don't buy the manufacturing improvement and I don't buy the manufacturing equipment. I as customer and each other customer too only see the IC. And for this reason Economics have to seperate the product "IC" from the manufaturing. So improvement of manufacturing doesn't necessaryly mean improvemnet of the IC yet.

And regardless of design and material an IC is an IC. Improvement of ICs doesn't mean that they are no ICs any longer. And the customer cannot see the design or the material - so he can't care about them if he buys an IC. The IC only works better, more safely and so on - this is scale too.

So what you wrote in your post is an information about how an IC is considered under the view of Engineering and I trust that this view is appropriate - for development, construction etc. But NOT for looking for economies of scale - to look for economies of scale the view of Economics has to be applied.

So under the view of Economics economies of scale have reduced the costs of data processing by a factor of 1,000 and they have reduced the costs of data storage by a factor of 1,000 too.

You wrote yesterday

Quote:
Ekkehard Augustin wrote:
Do you have in mind the question if economies of scale can reduce costs by the factor of 1,000 in general?
YES!


Because under the view of Economics economies of scale have reduced the costs of processing and of storing data by a factor of 1,000 the experience is that economies of scale can reduce costs by the factor of 1,000 - in general, at all. "In general" or "at al" doesn't mean that that factor must occur in each industry, product etc. - it only means that the detection of that factor in one industry, product etc. means that it is possible that that factor occurs in another industry, product etc. too.

This means that that factor may occur in spacecraft industry too and that it may have occurred in the industry of cars too - and when I have been speaking of a production equipment of 10,000,000 Euros I have been speaking of Otto-motors but not of cars. Don't you differ cars from motors??? I see a huge difference.

I still will reread SawSS1Jun21's documents and say something about the contents.

Please allways keep in mind in this section: the view of Engineering doesn't apply here in the Financial Barriers section - it's too restricted to Economics.



Dipl.-Volkswirt(bdvb) Augustin (Political Economist)


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Post    Posted on: Tue May 31, 2005 11:12 am
In between I reread SawSS1Jun21 links:

1. The document „Model T Ford“ says that after opening the new Model T plant in 1913 „one Model T every 93 minutes, a remarkable reduction from the 728 minutes per car that was previously required“. So the time required for production decreased by a little less than a factor of 8. It meant that 7 to 8 cars were produced per day and that 2100 to 2400 cars per year have been produced – the document is speaking of this plant only but don’t give hints what amounts have been produced by other plants of Ford.

The document says too, that in 1927, when the last Model T was produced the company produced one automobile every 24 seconds.

It is not correct to base a comparison on the two informations because it is not clear if the company had several plants or not but I will do a comparison to get a more complete image.

One car every 24 seconds means that the time required for production has decreased further by the factor of 232 to 233 – which would mean that the total factor since the time before the plant opened in 1913 was 1624 to 1864.

All these factors calculated based on the informations of that document – 7, 8, 232, 233, 1624, 1864 – are real costs but not monetary costs.

As we see the document seems to say that there was a decrease of real costs by a factor of 1,000 between 1908 and 1927 – a period of 19 years only.

The last calculated factors mean that the number of cars per year increased up to 3,410,400 to 44,73,600 – this is significantly less than the number of cars produced per year currently all over the world. Because of this it’s probable that further significant reductions of costs have occurred.

The document’s information regarding the new plant opened in 1913 means economies of scale.

Up to this point the document says that there were economies of scale reducing real costs by the factor of 1,000 between 1908 and 1927 – within 19 years only. The information fits into what the quotes of the book „Microeconomic theory" say about the causes of economies of scale.

But please note: nothing has been said about fixed costs... which is required.

2. Regarding the Dollars the document explicitly is speaking of the price. This price includes Ford’s profits – and these profits were high: Ford has become a very rich man. So this has nothing to do with costs – to try a conclusion from price to costs it is required to know the structure of the calculation of the price and the principles of calculation of the price applied.

The document say too that Ford payed wages of 5.00 Dollars per day which was much higher than the prevailing wages of 2.35 Dollars per day. So a down-adjustment would be required to see the economies of scale in real costs (calculated under 1.) in monetary costs – if informations about these costs including their structure were included in that document.

3. The time of production considered by the document and calculated under 1. Here is one cost-factor only – tehre are
others too the document doesn’t inform about. These other costs may outweigh the economies of scale found under
point 1.

4. The other document simply is an inflation calculator which uses the consumer price index.

That price index doesn’t measure prices but the price level. Hundreds of commodities – goods, services etc – are included and every four to ten years some commodities are exchanged by others. So this calculator can’t be used to adjust former prices to the current situation.

What that calculator can be used to is to adjust real income of the people.

So it can’t be applied to adjust costs.

I will try to look for some additional and more appropriate data but I don’t know if I find what I consider to be appropriate.

Pease note – the document about the Model T seems to suggest that Ford achieved economies of scale reducing costs by the factor of 1,000 – concerning one cost factor of several.



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Post    Posted on: Tue May 31, 2005 12:50 pm
Citation 1: Moore's Law
[quote=Moore's Law]The number of transistors that can be placed on a given surface area of an integrated circuit (IC) chip is doubled approximately every 18 months[/quote]
(emphasis added)

The technological improvements in microcomputer design and production continue to this day, and therefore the microelectronics industry is not a valid example for an industry in which consumer cost has been reduced due solely to mass-production.

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Post    Posted on: Tue May 31, 2005 1:23 pm
To this I can't agree - for the following reasons:

I know of Moore's Law. It seems to describe the progress of the scales of ICs achieved.

Each achieved scale is going to be produced in series once the new scale has successfully accomplished all test in the labs.

Each year at least in Germany millions of PCs are sold - and all over the world tens of millions. This means that during the 18 months Moore's Law is mentioning millions of ICs of the last achieved scale are sold - they are mass-produced and I can see the PCs they are installed in in the shops here in Hamburg.

The improvements and the mass production occur in parallel - while the last achieved scale is going to be produced in masses the process of improvements continues.

But this I didn't mean by speaking about ICs and Disks - what I meant really was that I see several scales of disks and several scales of IC-equipped CPUs supplied in the shops here in parallel. When I buy a disk or a CPU then this is cost for me and I could sell the documents, databases, programs etc. I create using that disk or CPU at the markets. If I divide those costs by the capacity and add the variable costs that depend on my creations and do a comparison of the results for the different scales of disks or CPUs - then I really get economies of scale as results.

This is what I meant - the ICs themselves provide economies of scale and the disks themselves provide economies of scale. My costs don't differ that much as the capacities are differing - I really get economies of scale and they are reducing my costs by a factor of 1,000. This is valid only regarding the creation of documents, databases, programs etc. currently - because I didn't consider other sources of costs yet.



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Post    Posted on: Tue May 31, 2005 10:38 pm
Hi Ekkehard,

We are just going around in circles about the definition of technology vs. scale. When production of a million 16 megabit DRAMs for $100 each changes to a million 256 megabit DRAMs for $100 each, I call that a technology innovation and you call it an economy of scale.

My real point is that aerospace does not show even the slightest chance of achieving the same level of performance improvement or cost reduction as semiconductors. Rocket engine specific impulse is not doubling every 18 months and never will without some kind of new technology, like pulsed fusion. Simply building more and bigger chemically fueled rocket powered space craft that fly more often will result in economies of scale comparable to the airlines. A good cost reduction, but not nearly enough to get a $20,000 trip to the Moon by 2030.


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Post    Posted on: Wed Jun 01, 2005 6:47 am
Hello, Peter,

so you seem to agree that there are differences of definition and image between Engineering and Economics. Please have another look into the .jpgs I e-mailed you and which I posted here too - one of them says

Quote:
Technological factors constitute a second force contributing to
economies of scale. If several different machines, each with a different rate of output, are required in a production process, the operation may have to be quite sizable to permit proper "meshing" of equipment.
Suppose only two types of machines are required, one that produces and one that packages the product. If the first machine can produce 30,000 units per day and the second can package 45,000, output will have to be 90,000 units per day in order fully to utilize the capacity of each machine.
Another technological element is the fact that the cost of purchasing and installing larger machines is usually proportionately less than the cost of smaller machines. For example, a printing press that can run 200,000 papers per day does not cost 10 times as much as one that can run 20,000 per day - nor does it require 10 times as much building space, 10 times as many men to work it, and so forth. Again, expanding size tends to reduce the unit cost of production.
Thus two broad forces - specialization and division of labor and technological factors - enable producers to reduce unit cost by expand-ing the scale of operation.9 These forces give rise to the negatively sloped portion of the long-run average cost curve.


This showes that Economics has a definition of technology too and technology is a source of economies of scale. So it can't be siad that economies of scale plus technology is required to achieve a special factor of cost reduction. But the definition of technology applied by Economics does include technologies too which don't cause economies of scale or which are considered to be breakthroughs by Economics - the first economically working fusion reactor for example could be such a breakthrough.

Engineering and Economics are using different definitions - but there are cross-overs were they have a common cutting set.

The point of all this is that it can't be predicted that economies of scale reducing costs by a factor of 1,000 are impossible in the production of space vehicles. May be that you don't see sources of them currently - but this doesn't mean that there can't be sources in the future really. These two - possibility and what can be seen currently has to be kept seperated carefully and precisely.

The best approach is to have a detailed look into SSO to look for possible chances for economies of scale and to go back this way through the whole vertical chain of prodcution down to the raw materials. I can offer a little bit of that and will do it - but first it seems to be required to set the thread back on focus and rails. It seemed to be in danger of suffering the fate of the Orbital Mechanics-thread.

I will set it back on focus and rails in my next post.



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Post    Posted on: Wed Jun 01, 2005 3:34 pm
Ekkehard Augustin wrote:
But the definition of technology applied by Economics does include technologies too which don't cause economies of scale or which are considered to be breakthroughs by Economics - the first economically working fusion reactor for example could be such a breakthrough.
Yes, a working fusion reactor would be a breakthrough, just as invention of the transistor was. In electronics, the economy of scale came from the realization that transistors could easily be integrated into a complete circuit during manufacture, and the state of the art in doing so has doubled every 18 months for decades now. There has been no such breakthrough in space travel. SS1 is evolved technology, not breakthrough. Nothing in aerospace has doubled in capability every 18 months and there is no sign that such a technology has just been invented. If it had been, we would all see it easily, just as we did with the transistor. The very fact that you need to look diligently to try and find that technological is the evidence that does not exist. Maybe it will be invented next year, but it has not been invented yet.


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Post    Posted on: Wed Jun 01, 2005 5:48 pm
Hello, Peter,

I am preparing a post to set the thread back on focus and on rails and so didn't wnat to add what I feel forced to say now: during thsi thread it has never been said that in private space vehicle construction there will be achieved breakthroughs or additional economies of scale evera eighteen months - from the begiining it only has been said that economies of scale during 25 years can reduce prices down to a level as that forecast by Collins. Harddisks only are an example providing factor 1,000 cost redcutions by economies of scale - the harddisks themselves provide them. This has been said only to show that economies really can reduce costs by that high factor.

So in general that factor is possible and it is worth the time to search for chances if that may be achieved in space vehicle construction too. This search never could be complete without significant involvement of Economics.

I will have ready the next post Friday earklliest - but I will include the necessity that we always must try to translate the terms and definitions of Engineering into Economics and reverse as well as the principles, the images and the thinkings: I fera that I see again a difference in your post...



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Post    Posted on: Wed Jun 01, 2005 8:44 pm
Ekkehard Augustin wrote:
economies of scale during 25 years can reduce prices down to a level as that forecast by Collins.
I am not convinced. You will have to offer much better evidence that this reduction will actually occur than you have so far.


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Post    Posted on: Thu Jun 02, 2005 2:20 am
Refering to the PC market, you are expecting engine ISP to double every 18 months?

2008? - Startup ~450 ISP Hydro/Lox
2010?- ~1000 ISP - Nuclear ground launch?!?
2012? - ~2000 ISP? Antimatter?
2014? - 4000 ISP? Huge ion drives?
2016? - 8000 ISP equivalent? Warp drives?
2018? - 16000ISP - Not even star trek has that..

Where is the real demand? in ten years after everybody with $100,000 to burn has seen space where will the sustained demand come from?

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