Friday, 13 August 2010

Capital isn't always a fixed cost

I'm teaching intermediate micro with calculus this semester.  So we do the usual drill on deriving the firm's supply function - the part of the firm's marginal cost curve above its average cost curve.  And how in the long run things like plant size that are fully fixed in the short run and consequently drop out of the cost function come back in the long run.

But plant size doesn't even need to be fixed in the short run when you've entrepreneurs around.  Case in point: New Zealand's craft brewing industry where a fair few excellent brewers don't use their own equipment but rather rent other brewers' plant.  So if you own physical plant and you want to scale back in the short term, you can always just rent out a bigger part of your plant to contract brewers.

YeastieBoys - one of NZ's more prominent and Twitter-active contract brewers - nicely outlines the advantages of renting other folks' plant:
  • It allows us the freedom of expression - brewing on a plant we don't own may cost us more on a batch to batch basis but it gives us a wider spectrum of risk in what we brew and allows us to spend more time thinking about seasonals and annual releases than meeting day-to-day demand of a range of "standard" beers that someone tells us the market demands.
They're having surely to pay a higher per-unit fee to the kit's owner, but are absolved from the more tedious parts of the job. So kinda like having someone on staff who covers all the principles-level teaching.
  • It allows us, and the contract brewer, far better economies of scale - Isn't economies of scale a term that big breweries talk about it? Well, if it is, it should be one that smaller breweries talk about more. Most craft breweries in New Zealand are running significantly below capacity (even if they don't think they are) and, in doing so, are wasting valuable dollars paying for underutilised land and plant. You can't be a great brewery unless you are a very good business.
There's an exam question somewhere in all this; I have a month or so to think about it.

I love these kinds of solutions. Like the "one day a week restaurant", it helps new guys get their start, helps to spread plant costs over more units output, and helps to ensure that I get more product variety.

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