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In recent news, Hong Kong officials say that they have found high levels of melamine in a batch of eggs imported from China, the same industrial chemical that has been found in milk supplies exported by the same country.

This adds to a growing list of products found to be tainted with melamine which indicates that it may be more widespread than previously thought. Add to this list the recycled condoms reported to have been reprocessed into hair bands, we can pretty much deduce that there are more products coming from China than we realize.

These are everyday items, consumable or not, that we take for granted and haven’t really stopped to think about where they may have come from. Which brings us to the question why China? It would appear that the Chinese manufacturers have mastered the principles of economies of scale based on the number of products being exported by them. According to Investopedia, economy of scale is the increase in efficiency of production as the number of goods being produced increases. In a typical situation, it means that the average cost per unit of a given product goes down as production increases since fixed costs are widely distributed over the increased output.

A common example is a toy factory. Which reminds me of the recall issued by giant toy manufacturer Mattel about a year ago for about 10 million toys made in China due to possible lead-paint hazards. Lets say the company invested in very expensive machinery to create these toys. This is a fixed cost, since it would be the same machinery that will produce all the toys for that factory. A variable cost would be the worker who will man the machinery. For one given worker, a certain number of toys are produced.

If another worker is hired, the number of toys produced goes up, without any significant increase in the factory’s variable cost. Since the same machinery is used, economy of scale emerges as the number of toys produced increased significantly than the factory’s cost of operation. Which is why most companies would put up factories in Asian countries since the cost of labor is way cheaper. Which is also why China is now slowly opening up to free trade policies to ensure that its products get a larger market, justifying economies of scale. But with the recent melamine scare and doubts over quality of goods being produced in China, I doubt that economies of scale would be the first thing on their minds.