Unit 7: Drivers of Flexibility, Video 3: Discount rate and Learning Promote | Summary and Q&A

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September 28, 2022
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Unit 7: Drivers of Flexibility, Video 3: Discount rate and Learning Promote

TL;DR

The discount rate is an important factor to consider when deciding between building large capacity plants or smaller units over time. Learning and competitive gaming also play a role in decision making.

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Questions & Answers

Q: What are the two choices for meeting growing capacity demand for electricity?

The two choices are building a big plant upfront for many years ahead or building small units over time as the market grows.

Q: How does the discount rate play a role in decision making for capacity investments?

The discount rate helps determine the present value of future investments and can counterbalance the advantages of economies of scale by discounting costs over time.

Q: How does learning affect unit costs?

Learning, or the production of more units, leads to lower unit costs as companies become more efficient in their production processes.

Q: What is competitive gaming in decision making?

Competitive gaming involves making a commitment in advance to signal to competitors and establish dominance in the market. It eliminates flexibility but can give a competitive advantage.

Summary & Key Takeaways

  • Building a large capacity plant upfront is based on economies of scale, while building smaller units over time allows for flexibility in meeting market demand.

  • Delaying investments and factoring in the discount rate can counterbalance the advantages of economies of scale.

  • Learning, or the production of more units leading to lower unit costs, can make future investments cheaper.

  • Competitive gaming, or making a commitment in advance, can signal to competitors and establish dominance.

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