Sunday, October 24, 2010

Will Economies Of Scale Bring Down The Cost Of Producing Electric Cars?

See High Battery Cost Curbs Electric Cars: Unlike Other Devices, Power Packs May Not Enjoy Major Economies of Scale from The Wall Street Journal. Experts don't all agree.

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

Suppose a company like GM makes and sells only 1 car a year. Then the average cost of making a car will be very high. But if they make thousands of cars a year, the high cost of building and maintaining the plant or factory is spread over all those cars and they can sell the car at a reasonably low price. This is what the government is hoping for with the batteries that run these new electric cars. The batteries account for about half the cost of the car.

According to the article "The U.S. Department of Energy has set a goal of bringing down car-battery costs by 70% from last year's price by 2014." If you buy an electric car, you can get a tax credit of $7,500. Perhpaps the government is trying to help the market achieve economies of scale. But there is a problem:

"Unlike with tires or toasters, battery packs aren't likely to enjoy traditional economies of scale as their makers ramp up production, the scientists and engineers say. These experts say increased production of batteries means the price of the key metals used in their manufacture will remain steady—or maybe even rise—at least in the short term."

The article discusses various other parts and inputs into the batteries and why their costs are not likely to fall. Some experts think a there will be a big fall in cost but others are doubtful.

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