Activity Title: "Imagine Running a T-Shirt Business"
Objective:
Understand how increasing production reduces the average cost per unit through a simple
mental exercise.
Steps:
1. Step 1: Small Production
o Imagine you print 10 T-shirts. Each T-shirt costs:
 $10 for materials (fabric, ink, etc.).
 $5 for your time and effort per shirt.
 Total cost for 10 T-shirts: 10×(10+5)=15010 \times (10 + 5) =
15010×(10+5)=150.
 Average cost per T-shirt: 150÷10=15150 \div 10 = 15150÷10=15.
2. Step 2: Large Production
o Now, imagine you print 100 T-shirts. Because you’re producing more, you
get a bulk discount, and your process is more efficient:
 Materials now cost $8 per shirt.
 Your time and effort per shirt drop to $3.
 Total cost for 100 T-shirts: 100×(8+3)=1100100 \times (8 + 3) =
1100100×(8+3)=1100.
 Average cost per T-shirt: 1100÷100=111100 \div 100 =
111100÷100=11.
3. Step 3: Compare
o Small production: $15 per T-shirt.
o Large production: $11 per T-shirt.
Reflection Questions:

Why did the cost per T-shirt go down when you made more?
Cost per T-shirt reduces with economy of scale as bigger lots produced yield the overall
reduced costs regarding raw materials and other operational inputs with the efficiency and
effectiveness also applied on per-unit basis among units. Here is why.
First, the purchase of materials in bulk reduces the cost per shirt. For example, if 10 shirts
are produced, the material cost per shirt is $10. When the production is increased to 100
shirts, the material cost per shirt goes down to $8. This is because the suppliers often sell at
a cheaper price when bought in large quantities, making each unit cheaper.
Second, more efficient labor and production also lower costs. In small production, the
time and effort per shirt cost $5, but in large production, this drops to $3. When producing
in bulk, workers and machines can optimize their processes, reducing the time wasted on
setup and task switching. As production scales up, businesses operate more efficiently, and
labor costs per shirt decrease.

How can businesses use this concept to offer lower prices to customers?
Economies of scale enable companies to cut their costs, and thereby sell their products
cheaply. In turn, this increases their probability to attract more customers in terms of cheaper
prices. Businesses can have key economies of scale in purchasing raw materials in mass. For
instance, a firm may receive a 20% discount when it buys 1,000 yards of fabric instead of 100,
lowering the material cost per T-shirt. Lower material costs enable firms to sell shirts at
competitive prices while still keeping a sufficient margin for profit.
Labor and production efficiency also go a long way in reducing the cost. When businesses
produce in large quantities, employees get more adept at their jobs and machines run nonstop
with less downtime. Labor costs per shirt go down and the overall production is more efficient.
Fixed costs such as rent, utilities, and equipment are spread over more units. If a factory pays
$1,000 in rent, then making 100 shirts means each shirt carries a $10 share of the rent.
However, if the factory manages to produce 1,000 shirts, then the cost for the rental of the
shirts drops down to just $1, and this makes each unit cost much cheaper.
A good example of an economy scale is, for instance, brands such as Penshoppe and Bench.
These companies normally manufacture thousands of shirts at a time, which allows them to buy
fabric in bulk, optimize labor, and properly align fixed costs. Consequently, they can sell shirts
at ₱300 to ₱500. Smaller firms producing fewer shirts may have to charge ₱800 to ₱1,000 per
shirt to cover their higher per-unit costs. Businesses can reduce costs, offer more competitive
prices, and attract more customers while remaining profitable by increasing the volume of
production.