29 December 2006

The price / volume curve

The economists amongst you will be familiar with the price / volume curve. Prices for small quantities are normally priced at a premium to the price for large volumes and this curve holds true for many types of products.

Is it universally true? No. Where doesn't it hold true? Scrap. If you are a jeweller who works with gold then you will produce gold waste in a variety of forms, some of which are highly impure. The greater volume of gold you collect, for a given level of purity, the higher the average price that you will receive from your buyers. That is why manufacturing jewellers burn their floorboards relatively infrequently - the price of scrap gold doesn't justify the cost of replacement floorboards very often.

Stupid example, I'm not a jeweller. OK, let's imagine that you have found a cigarette packet with some aluminium foil inside - you could remove the alumininium foil, separate it from the paper and you would find that it has virtually no value (I would be surprised if you could find a buyer) - collect a kilogramme and buyers would be willing to buy it, but at a discount to the bulk metal price and as you acquired more and more scrap aluminium foil, the greater the price you would achieve in the market.

It is almost universally true that the price / volume curve for scrap materials is the inverse to the price curve for manufactured product. That is why it is the business model for businesses in scrap to aggregate product and for businesses in manufactured products to break bulk - each is behaving rationally in order to achieve a price premium which justifies their behaviour.

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