...Economies of Scale, Economies of Scope and the Learning Curve In this paper I aim to thoroughly explain the differences between economies of scale, economies of scope and the learning curve. Although the first two are related, we will come to see that none are wholly dependent on another. Each of these are important in their own right as they enable firms to benefit in different ways. Furthermore I will describe the circumstances under which we are more likely to experience one of the aforementioned concepts instead of one of the others. Economies of scale exist when average costs decline through increased production. The theory behind economies of scale is that as firms increase their output the marginal cost of the last unit produced is less than the average cost, thereby pulling down total average cost. Many economists depict average cost curves as being U-shaped: From the diagram above we can see economies of scale exist until a certain point. At this point, known as the minimum efficient scale (MES), the marginal cost of the last unit produced starts to increase above average costs. Consequently, the firm begins to experience diseconomies of scale. Economies of scale are important because they allow firms at a certain stage to achieve a cost advantage over their competitors. As a result of this cost advantage available, scale economies are a key determinant of the market structure of an industry. If economies of scale can be easily obtainable, ceteris paribus,...
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...Economies of scope: Situation in which joint output of single firms is greater than output that could be achieved by two different firms when each produces a single product. This refers to how an organization can lower the average per unit cost by expanding the number of products/services if offers. By using the same facilities, equipment, labor force, technology, etc., a company can use product diversification to become more efficient and increase revenue. The theory is that selling several different products/services can be done more efficiently than selling only one product/service because the company can distribute the costs over a greater revenue base. Example using the Coca-Cola company: Economies of scope is at play when the company decides to use its current equipment, facilities, technology, labor to produce more beverages (i.e., Sprite, Fanta, Minute Maid) in an effort to diversify and lower costs. When they ship the more and more beverages using the same vehicle, they save money on shipping because the more products you ship, the more efficient it can become. The difference between Economies of Scale and Economies of Scope: Both are conceptually similar, but the following differences exist.Economies of scale is about gaining benefits by producing large volume of a product, whereas economies of scope brings benefits by producing a wide variety of products by efficiently use of the operations.Economies of scale refer to reduction in average cost for a single product...
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...Economies of scale are reductions in average costs attributable to production volume increases. They typically are defined in relation to firms, which may seek to achieve economies of scale by becoming large or even dominant producers of a particular type of product or service. A distinction can be made between internal and external economies of scales. Internal economies of scale occur when a firm reduces costs by increasing production. External economies of scale occur when an entire industry benefits from expansion; for example, through the creation of an improved transportation system, a skilled labor force, or by sharing technology. Economies of scope are reductions in average costs attributable to an increase in the number of goods produced. For example, fast food outlets have a lowe+r average cost producing a multitude of goods than would separate firms producing the same goods. This occurs because the preparation of the multiple products can share storage, preparation, and customer service facilities (joint production). ECONOMIES OF SCALE The basic notion behind economies of scale is well known: As a plant gets larger and volume increases, the average cost per unit of output is expected to drop. This is partially because relative operating and capital costs decline, since a piece of equipment with twice the capacity of another piece does not cost twice as much to purchase or operate. If average unit production cost = variable costs + fixed costs/output, one can...
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...Economies of Scale, Scope and the Learning Curve Economies of Scale, Economies of Scope and the Learning Curve In this paper I aim to thoroughly explain the differences between economies of scale, economies of scope and the learning curve. Although the first two are related, we will come to see that none are wholly dependent on another. Each of these are important in their own right as they enable firms to benefit in different ways. Furthermore I will describe the circumstances under which we are more likely to experience one of the aforementioned concepts instead of one of the others. Economies of scale exist when average costs decline through increased production. The theory behind economies of scale is that as firms increase their output the marginal cost of the last unit produced is less than the average cost, thereby pulling down total average cost. Many economists depict average cost curves as being U-shaped: From the diagram above we can see economies of scale exist until a certain point. At this point, known as the minimum efficient scale (MES), the marginal cost of the last unit produced starts to increase above average costs. Consequently, the firm begins to experience diseconomies of scale. Economies of scale are important because they allow firms at a certain stage to achieve a cost advantage over their competitors. As a result of this cost advantage available, scale economies are a key determinant of the market structure of an industry. If economies...
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...The Economies and Diseconomies of Scale and Scope Introduction Most of the company’s strategy in remaining to be competitive is trying to differentiate and get over its rivals which has the intentions of realizing the preferred seller and will have the highest returns into the industry. Thus, the choice of the firm had been affected relatively to the minimum efficient scale and the major issues that had been tackled to this issue are the economies and diseconomies of scale and scope (Forgang and Einolf, 2007, p. 151). Economies of Scale and Scope The economies of scale exist by the increase of the output of the goods through additional units while the costs decrease. On the other hand, the economies of scope exists when the firm increase the variety of the goods that it sells with the objective of saving to the total cost in comparing two firms produced of two goods. The economies of scale and scope are all found in the industry wherein it has the large scale of distribution, production, and retail for the process of cost advantage over the only small scale. There many sources of the economies of scale as the individualities and spreading of the fixed costs, the specialization of the division of labor, inventories, the increased of the productivity of the variable output, principles of engineering, purchasing and adverting. The disadvantages of this approach is relating to the lack of adaptability to the bureaucratic companies and inflexibility...
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...Economies of scale Economies of scale are the cost advantages exploited by expanding the scale of production in the long run. The effect is to reduce long run average costs over a range of output. These lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices. But economies of scale also give a business a competitive advantage in the market-place. They lead to lower prices and higher profits! The table below shows a simple representation of economies of scale. We make no distinction between fixed and variable costs in the long run because all factors of production can be varied. As long as the long run average total cost (LRAC) is declining, economies of scale are being exploited. Long Run Output (Units) | Total Costs (£s) | Long Run Average Cost (£ per unit) | 1000 | 12000 | 12 | 2000 | 20000 | 10 | 5000 | 45000 | 9 | 10000 | 80000 | 8 | 20000 | 144000 | 7.2 | 50000 | 330000 | 6.6 | 100000 | 640000 | 6.4 | 500000 | 3000000 | 6 | Returns to scale and costs in the long run The table below shows a numerical example of how changes in the scale of production can, if increasing returns to scale are exploited, lead to lower long run average costs. | Factor Inputs | | Production | | Costs | | (K) | (La) | (L) | | (Q) | | (TC) | (TC/Q) | | Capital | Land | Labour | | Output | | Total Cost | Average Cost | Scale A | 5 | 3 | 4 | | 100 | | 3256 | 32.6 | Scale B | 10...
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...inputs are fixed (typically capital) • Fixed vs. variable costs • Economies of Capacity • Operational and tactical decisions LONG RUN • All inputs are variable • Economies of Scale • Economies of Scope • Strategic decisions 1 October, 2013 Business Economics Short Run £ SRTC • Fixed Costs (FC): Cost of inputs that do not vary with output: e.g. plant. • Variable Costs (VC): Cost of inputs that vary with output: e.g. labor, utilities, etc... VC FC Q • Short-run total costs (SRTC)=FC+VC • Marginal Cost (MC): Cost of producing an additional unit of output £ MC ATC ���� = ∆���� ∆�� AVC • Average Variable Cost (AVC), Average Fixed Cost (AFC), Average Total Cost (ATC) AFC Q ���� ������ = �� ���� ������ = �� ���� ������ = �� 1 October, 2013 Business Economics Economies of Capacity (I) Economies Decreasing SRAC of Capacity Utilisation Diseconomies of Capacity Utilisation Increasing SRAC £ • AVC decreases because MCAC • Congestion (Law of diminishing returns) MC ATC Q Optimal Capacity Utilisation 1 October, 2013 Business Economics Economies of Capacity (II) Increase vs. decrease plant usage 1 October, 2013 Business Economics Long Run • In the Short Run, capacity (K) was fixed • In the Long Run, managers can decide to expand or reduce capacity. • All costs are variable Economies of SCALE Decreasing LRAC Diseconomies of SCALE Increasing LRAC £ SRAC (K1) LRMC SRAC (K5) LRAC’ LRAC ...
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...Lee The author Chung-Shing Lee is Director of Electronic Commerce Resource Center and an Assistant Professor of Information Systems and Technology Management in the School of Business at Pacific Lutheran University, Tacoma, Washington, USA. Keywords Internet, Economy, Innovation, Strategy Abstract Electronic commerce or business is more than just another way to sustain or enhance existing business practices. Rather, e-commerce is a paradigm shift. It is a ``disruptive’’ innovation that is radically changing the traditional way of doing business. The industry is moving so fast because it operates under totally different principles and work rules in the digital economy. A general rule in e-commerce is that there is no simple prescription and almost no such thing as an established business or revenue model for companies even within the same industry. Under such conditions, an analytical framework is needed to assist e-commerce planners and strategic managers in assessing the critical success factors when formulating e-commerce business models and strategies. This research develops an analytical framework based on the theories of transaction costs and switching costs. Both demand-side and supply-side economies of scale and scope are also applied to the development of this framework. In addition, e-commerce revenue models and strategies are also discussed. Based on the analytical framework developed by this research, this paper discusses the five essential steps for e-commerce success...
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...of cost curves 4.4 Marginal cost curve 4.5 Average cost curves 4. Costs in Short run and in the Long run 5.6 Short run 5.7 Long run 5.8 Economies of scale 5. Cost analysis in the real world 6.9 Economies of scope 6.10 Experiential learning & technological advances 6.11 Many dimensions 6.12 Unmeasured costs 6. Conclusion SUMMARY REFERENCES SUMMARY This study examines the different types of costs such as opportunity, implicit, explicit, fixed, variable and average costs that a firm would incur in order to carry out the production process. It talks about different types of cost curves to understand various measures of cost and establish a relationship between the changing patterns of different cost curves. It also tells how costs vary significantly in the long run and in the short run and how it effects the firms’ production and pricing decisions. Apart from the standard model, it also tells about the real world scenario in which the situations are even more complex than that of a text book. IT emphasizes the ground for economies of scale and economies of scope. It gives an overall picture of knick – knacks one has to possess in order to enter the market scene. 1. INTRODUCTION The cost incurred to make goods and services is called...
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...This paper has the purpose to study economies of scale and economies of scope in business using Chang Cooperation which is naturally a monopoly which can produce at a lower cost than others’ firms. They are using the economies of scale in decreasing the cost of production such as plastics, bottles, and fixed cost by produce large amount of outputs to decrease the total cost. However, Chang has now entered the long-run which make the average cost of production declines throughout the entire market. As a result, Chang Corporation can supply the entire market demand at a lower cost than the others’ firm. In the economies of scope, Chang produces various kinds of products such as Chang Classic, Chang Draught, and Chang Light. This make Chang Corporation reduce average and marginal costs in long-run, due to the production of similar or related goods or services where the output or provision of an item such as beer reduces the cost of item like water which has the same intermediate goods, bottle. Benefits: This study shows various benefits of being large firm behavior of taking advantages. Including, economies of scale benefit, which firm earn absolute cost advantages due to producing large amount of outputs. Vice versa, there are also some external factors in affecting the economies of scale such as a better transportation network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are said to have been achieved. Another...
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...Chung-Shing Lee is Director of Electronic Commerce Resource Center and an Assistant Professor of Information Systems and Technology Management in the School of Business at Pacific Lutheran University, Tacoma, Washington, USA. Keywords Internet, Economy, Innovation, Strategy Abstract Electronic commerce or business is more than just another way to sustain or enhance existing business practices. Rather, e-commerce is a paradigm shift. It is a ``disruptive’’ innovation that is radically changing the traditional way of doing business. The industry is moving so fast because it operates under totally different principles and work rules in the digital economy. A general rule in e-commerce is that there is no simple prescription and almost no such thing as an established business or revenue model for companies even within the same industry. Under such conditions, an analytical framework is needed to assist e-commerce planners and strategic managers in assessing the critical success factors when formulating e-commerce business models and strategies. This research develops an analytical framework based on the theories of transaction costs and switching costs. Both demand-side and supply-side economies of scale and scope are also applied to the development of this framework. In addition, e-commerce revenue models and strategies are also discussed. Based on the analytical framework developed by this research, this paper discusses the five essential steps for e-commerce...
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...rubber boots. These products are low tech and relatively easy to manufacture, thus a competitive advantage lies with those who can deliver the product cheaper then competitors. Nokia achieved these economies of scale through developing highly efficient manufacturing process conducted by high performance teams. Nokia has internal culture and systems, which promote competition between internal groups. This results in positive outcomes from a cost / production point of view but is counter-intuitive and produces negative results for projects where collaboration is required, such as software development. In environments where collaboration is required in order to roll out initiatives quickly, this internal competition work for Nokia. However in an environment where over arching systems are being rolled out successively by competitors, than this lack of internal cohesion works to Nokias disadvantage. Before LUMIA - Economies of scale/ scope 1. Symbian – economies of scale with production of cheap handsets + Symbian operating system 2. Huge manufacturing platform, attractive Nordic design, effective logistics 3. Opportunity to team up with Microsoft prior to 2007 and continue focus on strengths, above, while Microsoft develops technology. After LUMIA - Economies of scale As smartphones are essentially hand held computers these days, a large portion of their value proposition is with software and application. By contracting Microsoft or android to supply software...
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...ASSESSMENT REFERENCE: ME/JULY12/2 STUDENT NUMBER: 8772637 ANALYZE THE STEPS TOWARDS COST LEADERSHIP WITHIN THE PRODUCTION RELATIONSHIPS OF A MODERN FIRM. Every business entity must strive to develop a competitive advantage in order to continue as a going concern and thrive amidst severe competition in its industry. A firm can master different strategies in order to ensure its continuous growth and corner a good market share in its industry. One of such strategies is the cost leadership strategy, which seeks to offer a product or service to the consumer at the lowest price possible by identifying the cost centres within its operation and buy implementing strategies to reduce its production costs. A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. The ability of a valuable cost-leadership competitive strategy to generate a sustained competitive advantage depends on that strategy being rare and costly to imitate. (Ecofine 2012). In addition, Allen et al. (2007) cited in Strategy BlogSpot (2011) stated that “a cost leadership strategy is effectively implemented when the business designs, produces, and markets a comparable product more efficiently than its competitors. The firm may have access to raw materials or superior proprietary technology to lower costs”. Examples of companies that have mastetered the cost leadership strategy include McDonalds and IKEA. For McDonald's...
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...1. Globalization meaning components Globalization is that the shift toward a more integrated and interdependent world economy such as markets and production. Merging of historically distinct and separate national markets into one huge global marketplace is standardized by global products such as Coca-Cola, Sony PlayStation and so on. Companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering- increasing their competitiveness. Therefore, they seek for source of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production. Macro factors such as declining in trade barriers and technological changing are facilitating the globalization. Production dispersed to economical locations due to transportation and communication advances. New markets opened through WWW. Jet aircraft move people and goods. Global media is creating a worldwide culture. Furthermore, the word economy, trade, and FDI used to be dominated by the U.S., but the proportion of dominance has been dispersed globally and separate national economies merging into an interdependent global economic system. Consequently, these components are creating the globalization. 2. Characteristics of multinational firms MNEs have substantial direct investment in foreign countries, which is not just an import-export business. MNEs use the active management of these offshore assets rather...
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...advantages of Horizontal Integration • Staff Welfare - Employees may attain greater satisfaction in a horizontal structure due to greater freedom and autonomy. The use of cross-function teams can also lead to high levels of cooperation throughout the organization. The heavy emphasis on innovation can lead to ideas that keep the organization ahead of the competition. The absence of multiple structural layers provides streamlined communication and reporting processes, making the organization more nimble and adaptable to change. • Economies of Scale - Economies of scale provide cost advantage to the companies through expansion of their product output. When goods are produced in larger quantities, the average cost per unit reduces, thus increasing the profitability of the company. Integrating horizontally provides the companies with broader access to different unreached markets, resulting in an increase in demand of their product. Reaching to economies of scale by horizontal integration can help a company to achieve cost monopoly and eliminate competition from the...
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