From the calculations above, it is clear that Scenario 5 and Scenario 6 has the highest ratio between the cakes produced and the number of bakers that produced the cake. Therefore, both these scenarios are the most optimum production set up. Out of these Scenario 6 showing the 35 cakes produced is taken as the most optimal as more cakes produced than in Scenario 5, meaning higher production that helps further economies of scale.
The theory of economies of scale is applied above. Considering the labor cost of the bakers as constant in all scenarios explained above, the scenario 5 and scenario 6 has the highest production rate to cost. In other words, the production in these two scenarios has the least relative cost to the number of cakes produced.
If a firm starts growing by opening new factories, the production in the factory gets better and better. As a result, the factory can produce more output per unit of input. Thus, the firm experiences increasingly lower average cost as the firm grows bigger. As a thumb rule, bigger sized firms have lower production cost. This concept can be explained with the illustration of two shoe companies: Luigi’s Fine Italian Shoes and Nike. Nike manufactures shoes in huge factories located in Indonesia. It then ships them all parts of the world in containers of 100,000 shoes in each. On the other hand Luigi manufactures shoes in garage with two employees. Nike has the economies in size that is not enjoyed by Luigi. However, if Luigi grows in business, there would be a decline in average total costs (Sullivan & Sheffrin 2003).