...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)...
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...ASSIGNMENT 2: ECONOMIES AND DESECONOMIES OF SCALE AND HOW THEY AFFECT COST. ECONOMIES OF SCALE When more units of a good or service can be produced on a larger scale with less input costs, then economies of scale are achieved. Economic growth is achieved when economies of scale is realized, this then implies that as a company grows and production units increase, the company will have a better chance to decrease its costs. There economies of scale are the cost advantages that a company obtains due to expansion, which leads to unit cost reduction as the scale of operations increase. There are two sources of economies of scale: internal and external economies. Internal economies are specific to a company while external economies of scale are beneficial to all the entire industry. Internal economies of scale include the following: 1. Labour economies- Increased of labour is a major source of labour economies. The extent of division of labour is preconditioned by the scale of output. As output increases and the labour force grow, a greater degree of specialization, with all its advantages, may become possible. 2. Technical Economies- Technical economies of scale occur when a business invests in new technology and is able to increase production. As a result, production costs per unit will fall. For example: a) Economies of superior technique: * Firms can use high technique and capital goods. * Firms can install high quality machine and capital goods. ...
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...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...
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...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...
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...Contents Utility before 1920’s 2 Utility measurements 2 CARDINALIST AND ORDINALIST UTILITY APPROACH OF CONSUMER BEHAVIOUR 3 CARDINALIST UTILITY APPROACH 3 Marginal utility 4 Assumptions of Cardinal Utility Analysis: 5 Cardinal Measurement of Utility 5 Rationality 6 Diminishing marginal utility 6 ORDINALIST UTILITY APPROACH 7 Rational behavior of the consumer 8 Ordinal Utility 8 Diminishing marginal rate of substitution 8 Consistency selection 8 Transitivity/Consumer’s preference is not self-contradictory 8 Goods consumed are substitutable 9 ECONOMIES AND DISECONOMIES OF SCALE 16 ECONOMIES OF SCALE 16 Definition: 16 Internal economies of scale 16 External economies of scale 18 DISECONOMIES OF SCALE 20 Internal diseconomies of scale 20 External diseconomies of scale 21 CONCLUSION 22 INTRODUCTION Utility before 1920’s: One reason why utility theory was not of great significance is explained by the “ Paradox Value” by economist/philosopher Adam Smith in 1800’s. Also known as Diamond-Water Paradox, it addressed why absolute necessities such as water are valued (priced) so cheaply, while frivolities like diamonds are highly valued and command outrageous prices. Many economists then thought utility was not the cause of price and therefore concentrated on cost of production as the explanation of price.It was until economist Jevons (1871), established how the paradox value could be resolved by associating price with degree of utility, that is marginal...
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...efore the rise of modern corporations, business owners predominantly personally managed most private economic operations. These small-scale operations had little influence outside their regional realm. Eventually, American capitalism evolved from a proprietary-competitive stage to a corporate-administered stage as a result of numerous factors. Economies of scale became more applicable with innovations in transportation, communication, production, management, distribution, and marketing. As a result, America transformed into a global economic power. From 1870 to 1913, the United States’ distribution of the world’s industrial production rose from 23 percent to 36 percent (Chandler, 4). Comparing this substantial growth to other industrious countries of the time exemplifies America’s dominance. In the same time span Great Britain fell from 32 percent to 14 percent, Germany rose from 13 percent to 16 percent, France dropped from 10 percent to 6 percent, Russia rose from 4 percent to 6 percent, Japan rose from 0 percent to 1 percent, and the rest of the world rose from 17 percent to 21 percent (Chandler, 4). Capital intensive, mass production industries that rose during the 2nd half of the 19th century distinguished American business from economic institutions in other cultures and set the foundations of what is now known as the American corporation. Standard Oil An industry that was a pioneer in changing the early business landscape was the petroleum sector. In 1859, the first...
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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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...What Are Economies Of Scale? September 06 2009| Filed Under » Adam Smith, Alfred Marshall, Economies of Scale, When more units of a good or a service can be produced on a larger scale, yet with (on average) less input costs, economies of scale (ES) are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. According to theory, economic growth may be achieved when economies of scale are realized. Adam Smith identified the division of labor and specialization as the two key means to achieve a larger return on production. Through these two techniques, employees would not only be able to concentrate on a specific task, but with time, improve the skills necessary to perform their jobs. The tasks could then be performed better and faster. Hence, through such efficiency, time and money could be saved while production levels increased. Just like there are economies of scale, diseconomies of scale (DS) also exist. This occurs when production is less than in proportion to inputs. What this means is that there are inefficiencies within the firm or industry resulting in rising average costs. Internal and External Economies of Scale Alfred Marshall made a distinction between internal and external economies of scale. When a company reduces costs and increases production, internal economies of scale have been achieved. External economies of scale occur outside of a firm...
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...Marginal rate of technical substitution From Wikipedia, the free encyclopedia Jump to: navigation, search In economics, the Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( − Δx2) when one extra unit of another input is used (Δx1 = 1), so that output remains constant ([pic]). [pic] where MP1 and MP2 are the marginal products of input 1 and input 2, respectively, and MRTS(x1,x2) is Marginal Rate of Technical Substitution of the input x1 for x2. Along an isoquant, the MRTS shows the rate at which one input (e.g. capital or labor) may be substituted for another, while maintaining the same level of output. The MRTS can also be seen as the slope of an isoquant at the point in question. [edit] References • Mas-Colell, Andreu; Whinston, Michael; & Green, Jerry (1995). Microeconomic Theory. Oxford: Oxford University Press. ISBN 0-19-507340-1 [edit] See also • Marginal rate of substitution (the same concept on consumption side) Retrieved from "http://en.wikipedia.org/wiki/Marginal_rate_of_technical_substitution" Categories: Microeconomics | Production economics • marginal rate of technical substitution (MRTS) - The rate at which one input X may be substituted for another input Y in a production process, while total output remains constant, is: a) the slope of the isoquant curve b) the marginal rate ... • Micro Economics - A firm purchases...
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...in relation to (please address all items in the below list and provide support for your conclusions): 1. Cost a) Cost of Production: Cost of production is $8.00 per pound for mushroom/bell anchors and $11.00 per pound for snag hook anchors. The cost of production definition is the cost of making or acquiring goods and services that directly generates revenue for a firm. It consists of direct and indirect costs. (Cost of Production, 2013) b) Economies of Scale in material purchasing: An economy of scale is the reduction in long-run average and marginal costs arising from an increase in size of an operating unit. (Economies of Scale, 2013) It can be external or internal; external will increase the productivity of the industry and will result in a reduction of costs (External Economies of Scale, 2013) and internal is related to the shift in average production costs for a business as it boosts its overall product output and the average cost per unit falls until maximum efficiency is attained. (Internal Economies of Scale, 2013) Albatross could save money if they bought items in bulk but since they make items as orders are received,...
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...Firstly, the most important factor for external economies of scale is having a large number of good skilled local labour supply which makes an industry more efficient as other local companies in the industry also train workers. It leads a bigger and more flexible labour market in that area. Secondly, a factor of external economies of scale is firms located in certain areas where can benefit from good infrastructure such as good transportation network, a motorway or an airport. It will affect to decrease in costs for a company working within that area. Furthermore, having a large number of suppliers to choose from economies of scale. Firms will easily bargain with a range of suppliers if firms locate near to lots of suppliers. It tends to reduce cost and increase the quality of materials. The business can grow internally by getting bigger or they can grow externally by taking over or merging with another business. Sometimes when businesses grow they become more inefficient and costs per unit begin to increase. There are three main problems of diseconomy of scale. On the other hand, diseconomy of scale can be caused by poor employee motivation. Gregson et al(2009:134) argues that it can be hard to motivate people in a big business but in a small firm they are close contract between managers and staffs. Therefore, staffs may feel isolated, lack the feedback and there is no point to what they are doing. Poorly motivated staff do not work as hard and absenteeism increases...
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...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...
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...is rising, you grow your company. 2. Describe economies of scale and economies of scope as rationales for firm growth. . Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average costs of production. Some examples of how economies of scale work: Technical economies of scale: Large-scale businesses can afford to invest in expensive and specialist capital machinery. For example, a supermarket chain such as Acme or Wegman’s 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. Specialization of the workforce: Larger businesses split complex production processes into separate tasks to boost productivity. By specializing in certain tasks or processes, the workforce is able to produce more output in the same time. Marketing economies of scale: A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market. A good example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts. The major food retailers also have buying power when purchasing supplies from farmers and other suppliers. Financial economies of scale: Larger firms are usually rated by the financial markets...
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...Internal Environment The internal capabilities of a company will determine the stage in the value chain. Using the Mckinsey generic value chain, we have the following stages: Technology Development - Product design – Manufacturing – Marketing – Distribution - Service Technology development: This can also be referred to as Research and Development. Vodafone places a lot of importance on this because the company has achieved economies of scale with this. The technology and infrastructure platform is replicated in all the countries of operation , it is known that sharing fixed costs across all countries of operation can contribute to cheaper operations. Setting up a service centre in India is which is central to the group operations also helped in achieving economies of scale. Product Design: Vodafone’s products are technology based and so product design is linked to technology development. The fact that the company designs their products ensures that they determine the functionalities, characteristics, aesthetics and quality. Manufacturing / Distribution: This can be closely linked to Vodafone’s supply chain. Network construction and maintenance is outsourced particularly in emerging markets like China and India. Purchase of equipment, software and handsets are centralized and economies of scale has been achieved through this because the company strikes direct deals with the manufacturers of the various products. Vodafone sits at a pivotal position in the supply...
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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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