...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...
Words: 343 - Pages: 2
...There are several ways how companies can grow. Expanding the scale of the firm's production is one way to grow their business. In term of economies and diseconomies of scale ,these are linked to benefits and drawbacks of the rising productive capacity of firm. Gregson et al (2009:134) states that economies of scale occur when a firm increases output, the cost of producing each item goes down ,but diseconomies of scale make the unit cost of production rise as output rises. This essay will analyse the economies and diseconomies of scale. After first considering the factors for internal economies of scale,it will examine the factors of external economies of scale. Then, it will discuss the problems which are related to these factors for diseconomies of scale. There are many factors for internal economies of scale which allow the business can to become more efficient. One reason for economies of scale is Managerial economies. In large firms the business can benefit from specialisation. Specialisation economies of scale are related to employees. Gregson et al(2009:134) states that large-scale manufacturers can employ managers with specialist skills and separate them into specialised sectors. It means the work is usually done more quickly and the quality is higher than in non-specialised companies. Another factor for internal economies of scale is technical economies which are linked to production. Production methods for large figures are often more efficient. Brewer (2004:62)...
Words: 516 - Pages: 3
...1. Scale Economies and Diseconomies at McDonalds: How does having a menu that is uniform around the country provide McDonald’s with economies of scale? How is menu planning made more complex by expanding into other countries? Having a menu that is uniform around the country provides McDonald’s with economies of scale because when people order their food they can order more to make it cheaper. According to Investopedia, “an economy of scale is the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are shared over a larger number of goods.” (Investopedia, 2014) Also, no matter where you go around the country people know what they have on their menu. They already know what they want. By knowing already, people might order more because they know what to expect and what food McDonald’s already has. Menu planning gets more complex when they expand into other countries. This is because certain countries do not eat certain things. They have to be careful not to offend anyone by their products they serve. For example, in India they do not eat cow. Cow is sacred to them so McDonald’s would not be able to be there and serve hamburgers that are made from cows. The people from India would be highly offended by that. Another example of this would be Israel that is predominately Jewish. Jews do not eat bacon because it comes from a pig. Therefore, McDonald’s would not be able to serve hamburgers with bacon. They also would have to...
Words: 556 - Pages: 3
...Internal and External Economies/Diseconomies of Scale Economies of Scale: * Economies of scale are the cost advantages that a business can exploit by expanding the scale of production * In the long run, all factors of production are variable. This has an effect on costs as output changes. To start with long run costs fall as output increases. Economies of scale are then said to exist. * However some firms become too large and their average costs begin to rise. They are then said to experience Diseconomies of scale. * You can have both internal and external versions of economies of scale. Internal Economies of Scale These are ‘Economies of Scale which arise because of the growth in the scale of production within a firm’. So there are a variety of sources of internal economies of scale. TECHNICAL ECONOMIES OF SCALE * Large-scale businesses can afford to invest in expensive and specialist capital machinery. For example, a supermarket chain such as Tesco or Sainsbury can invest in technology that improves stock control. It might not, however, be viable or cost-efficient for a small corner shop to buy this technology. * The law of increased dimensions. This is linked to the cubic law where doubling the height and width of a tanker or building leads to a more than proportionate increase in the cubic capacity * These occur from what happens in the production process MARKETING ECONOMIES OF SCALE * A large firm can spread...
Words: 900 - Pages: 4
...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...
Words: 1357 - Pages: 6
...ECONOMIES OF SCALE Explain how internal and external economies and diseconomies of scale arise as a firm expands its production. INTRODUCTION In the long run production period the firm can avoid the onset of diminishing returns by varying any or all of the factors of production. Economies of scale refer to the reduction in costs per unit of output as output increases and diseconomies of scale refers to the increase in average costs of production as output increases. This can be demonstrated through the long run average total cost curve (LRAC) curve (shown in the diagram below), which is an economic model represents the locus of points that join average costs associated with differing levels of output and plant sizes. -LRAC curve In the above diagram, if the firm produced output level OX, its average cost of production would be AC. If the firm expanded its plant size in the long run and produced at output level OY, the average cost of this level of output would fall to AC1. The average cost (AC1) at output OY is the minimum point (T) on the LRAC, and is the lowest average cost per unit that the firm can achieve for any given level of output with this scale of plant. This minimum point (T) on LRAC in the diagram above is known as the technical optimum. The technical optimum is the most efficient level of production for a firm. At this point, average costs of production are at their lowest possible level. This is the achievement of an economy of scale by the firm. By...
Words: 981 - Pages: 4
...competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called “market failure.” In my view, however, the degree of “market failure” for the American economy is much smaller than the “political failure” arising from the imperfections of economic policies found in real political systems.f monopoly pricing. Here is the assessment of economist George Stigler, who won the Nobel Prize for his work in industrial organization: A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called “market failure.” In my view, however, the degree of “market failure” for the American economy is much smaller than the “political failure” arising from the imperfections of economic policies found in real political systems.f monopoly pricing. Here is the assessment of economist George Stigler, who won the Nobel Prize for his work in industrial organization: A famous theorem in economics states that a competitive enterprise economy will produce the largest possible income from a given stock of resources. No real economy meets the exact conditions of the theorem, and all real economies will fall short of...
Words: 722 - Pages: 3
...r rr ECONOMIES AND SCOPE OF SCALE 2 r r r r r r r r r r r r r r r r r r r r r r r r r rr F ew concepts in microeconomics, if any, are more fundamental to business strategy than economies of scale and the closely related economies of scope. Economies of scale allow some firms to achieve a cost advantage over their rivals. Economies of scale are a key determinant of market structure and entry. Even the internal organization of a firm can be affected by the importance of realizing scale economies. We mostly think about economies of scale as a key determinant of a firm’s horizontal boundaries, which identify the quantities and varieties of products and services that it produces. The extent of horizontal boundaries varies across industries, along with the importance of scale economies. In some industries, such as microprocessors and airframe manufacturing, economies of scale are huge and a few large firms dominate. In other industries, such as apparel design and management consulting, scale economies are minimal and small firms are the norm. Some industries, such as beer and computer software, have large market leaders (Anheuser-Busch, Microsoft), yet small firms (Boston Beer Company, Blizzard Entertainment) fill niches where scale economies are less important. An understanding of the sources of economies of scale and scope is clearly critical for formulating and assessing competitive strategy. This chapter identifies the key sources of economies of scale...
Words: 16512 - Pages: 67
...ECONOMIES and DISECONOMIES OF SCALE Economies and diseconomies of scale explain what happens to a firm’s costs as it expands, in the LONG RUN. The long run is the time period in which it is possible for a firm to vary the amounts of all the factors of production employed: more land can be acquired, more buildings erected and more machinery installed. In the long tun, it is possible for a firm o change the scale of it’s activities. Strictly speaking, a change of scale takes place when the quantities of all the factors are changed by the same percentage so that the proportions in which they are combined are not changed, shown by the following table. It will be noticed that when the inputs are changed, leading to an increase in the size of the firm, (see column “Increase in Size of Firm”) by a certain proportion that the output increases by a different proportion (see column “Increase in total Output”). At first, output increases by a larger proportion than the increase in size of firm; this is called Increasing Returns to Scale. Then output increases by the same proportion as the size of the firm; this is called Constant Returns to Scale Eventually output increases by a scale proportion than the size of the firm; called Diminishing Returns to Scale The above has been explained in terms of changes in physical units. Not surprisingly, since firms have to pay for the inputs which they use to increase the scale of their production then their costs of production are...
Words: 3302 - Pages: 14
...payment of their coffee. Oxfam is giving indications that the current crisis is as a result or coffee rosters deliberating on the prices to pay farmers thereby interfering with the free market. Hence, the market for coffee is not perfectly competitive given that the players cease to be price takers and affect those prices. In perfectly competitive markets, there are infinite sellers and buyers in that the entry or even the exit of one seller or buyer does not affect the market (King et al 61). In addition, there should be absence of either political or social barriers that will hinder the entry of other companies into the market (Baumol and Blinder 27). Products offered ought to be homogenous and the concept of no increasing returns to scale facilitates the sufficiency of firms in the market. Clearly, there are a score of characteristics that the coffee industry fails making it not a perfect competition market. As a result, companies like affect the market directly and the collapse of such companies will render the entire market failed. World coffee market fails in a number of factors for it to pass as a perfect competition market. Firms deliberate on the prices indicating that paying the farmers higher price will only increase glut. According to the article, Starbuck is large player in this market and if its customers see the corporation as a Third World profiteer there will be consequences on the entire...
Words: 931 - Pages: 4
...17/04/2012 Semester1, 2012 Professions Learning Centre Marg Chapman What is a case study? A report presenting an analysis of problems and issues facing a particular company, with recommendations of a plan of action and justification of that plan What is the purpose of a case study? To persuade audience that the recommendations are feasible, desirable and the best ones available Who commissions one? A client, or a firm‟s senior management who are seeking a way forward understanding of case study approach clarification of directive words used in assignment tasks model of how to deconstruct process of writing a case study understanding of logical flow required in analysis of a case and indication of content relating to each section of report report structure analysis of language structures & cohesion models of integration of sources and referencing Directives tell you what to do with content and are closely associated with purpose of different sections in case study report. Importance of understanding precise meanings of key directives to meet task requirements. (Communication Skills Guide p22) Analyse Explain Justify Evaluate A. Present an informed assessment of something to judge how important/valuable it is B. Break down into main parts/important features. Discuss each &how they relate to each other • Evaluate firm‟s current situation (macro & micro) ...
Words: 1353 - Pages: 6
...Internal economies of scale As a business moves to a larger scale of operations in the long run, it may experience falling average costs. If the unit cost falls as the scale of operations increases, the business is said to be benefiting from internal economies of scale Technical economies of scale: A business may invest in capital equipment, such as a production line. If this equipment is used only on a small scale, this will be expensive (for example, the high costs of the production line may be spread only over a few hundred units of production). If production occurs on a larger scale, the cost per unit is likely to be lower because the costs of the investment are spread over more units. Some technology designed for large-scale production and will be inefficient if used on a small scale. Think of farming: if you have only one field, but buy a tractor, this equipment is not used to its full potential. As you expand your farm, your tractor can be used more efficiently. This helps to explain why farming production is increasingly undertaken by fewer larger farms that are able to use their technology efficiently and spread costs in a way with which small farms cannot compete. Similarly, a production line will be efficient if it is not used for the scale for which it has been designed: the production line at Coca Cola can produce 2,000 cans per minute. Imagine the impact on the cost per unit if it were to produce only one can per minute. Therefore to reduce unit costs machinery...
Words: 746 - Pages: 3
...important specific advantages were its good value for the money. IKEA used this advantage for its expansion plans all over the world. IKEA when they failed in the USA had to highlight this specific advantage to bail them out of the financial difficulty they had gotten into. Second, the most innovative decision of IKEA is to reduce merchandise costs through involving customers in the assembly cycle. This idea allows saving on warehouse costs and helps to reach another economy for customers on transportation costs. As a result of new store layout, IKEA has been able to allow sales clerk to focus more on in-store displays and fast moving lines. Another set of firm specific advantages of IKEA is related to the relationship with suppliers. IKEA has created global sourcing network of more than 2,300 suppliers in 67 countries. With these connections around the world, it has been able to cut price at many stores while maintaining sufficient quality standards. Because of these influences, IKEA experiences huge economies of scale, allowing it to match rivals’ quality while undercut prices worldwide. Lastly, IKEA has its legacy of quality in different countries. IKEA has always maintained the best quality in all the countries that it has opened outlets in. It’s creative business model and store layout has created its own advantages for IKEA, as word-of-mouth advertising, along with limited traditional advertising and record-breaking distribution of free catalogues, have created an unmatched...
Words: 636 - Pages: 3
...Identified social trends- visionary 3. Flexible- Trends, cultures- although couldn’t adapt the quality 4. Punctuality and execution 5. Innovation 6. Growing very fast RESPONSIBILITIES 1. International conference calls 2. Taking responsibility of employees and incidents within organisation 3. Controller of the organisation (CEO). His wife and him are the shareholders. 4. Looking for new ways to innovate and provide better services 5. Analysing the customers 6. Keep Pace 7. Maintain flexibility 8. Punctuality maintenance 9. Maintain quality 10. Maintain customer relations 11. Face legal issues WEAKNESSES 1. Small company- limited resources, opportunities, employees and less economies of scale 2. Too centralised- no one to question actions- can make potential mistakes STRENGTHS 1. Flexible organisational structure 2. Quality 3. Customer focus 4. Customised search engine- unique filter features 5. Passion of owner 6. Quick decision making 7. Financially independent 8. Creative/Innovative/ Entrepreneurial 9. High growth market 10. Growing customer base THREATS 1. Competitors (New and Existing) Say Apple bough SB 2. Acquisition threat from Getty 3. Changing trends of customer 4. Copyright threat from freelancers 5. Privacy threats- legal changes 6. Technological hacking and viruses SUBSTITUTES Very Low THREATS Very Low BARGAINING POWER High NEW IDEAS...
Words: 393 - Pages: 2
...Shifts In Market Supply and Demand nd of mine enjoys reminiscing about the good old days. His favorite subject is discussing the prices of what things used to be. Discussing how $8 dollars would get you a seat at Tiger Stadium, a hot dog, and a beer. Then the conversation always ends up with him saying "I used to get 6 gallons of gasoline for a dollar" (which equates to just over 16 cents a gallon). Can you imagine six gallons for a dollar? In the spring of 2013 over memorial weekend I paid $3.97 per gallon to fill up my tank. How could this happen? Some want to blame profiteering oil companies, but economists prefer explanations based on supply and demand (Stonebraker, 2013). 1. Soaring gasoline prices are nothing new. It's old hat to those of us with enough gray hair to remember the energy crisis of the 1970's. Gasoline as we all know is made from crude oil. In 1973 a barrel of crude oil was $3.00 dollars. The price of crude oil shot up in 1980 to $35.00 a barrel. Crude oil then took a long slide through the 80's and 90's falling to almost $10 dollars a barrel in 1998 before rising again over the last decade, falling back and spiking again. If we adjust these prices for inflation we get an even more interesting prospective. The chart below traces the price of a barrel of oil over the last 50 years in terms of 2012 prices. The price increases of the 1970's look remarkably similar to those of the 2000's. Adjusting it for inflation, oil prices in recent years are not much different...
Words: 673 - Pages: 3
