...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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...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...
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...A look at McDonalds and the Movies Economies and Diseconomies of Scale Student March 5, 2013 Principles of Microeconomics Scale Economies and Diseconomies at McDonalds: How does having a menu that is uniform around the country provide McDonald’s with economies of scale? McDonald’s use of a uniform menu around the country helps to provide it with economies of scale. “What determines the shape of the long-run average total cost curve… is scale” (Krugman & Wells, 2013), the size of a firm’s operations is often an important determinant of its long-run average total cost of production. Firms, like McDonalds, that experience scale effects in production find that their long-run average total cost changes substantially depending on the quantity of output they produce. There are increasing returns to scale (also known as economies of scale) (Krugman & Wells, 2013) for companies, like McDonalds, when long-run average total cost declines as output increases. On the other hand there are decreasing returns to scale (also known as diseconomies of scale) for companies like McDonalds, when long-run average total cost increases as output increases. Economies of scale means that something is made cheaper when it is produced in great quantities spreading the average total cost over a larger quantity. For McDonalds the uniformity of its menu means that it can produce large quantities of products and spread its average total cost over a large quantity and reduce...
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...What is the difference between economies of scale and diseconomies of scale and what are the reasons for using each? How do you purchase these types of economies? Economies of Scale vs Diseconomies of Scale Economies of scale and diseconomies of scale are related concepts and are the exact opposites of one another. Economies of scale arise when the cost per unit reduces as more units are produced, and diseconomies of scale arise, when the cost per unit increases as more units are produced. A firm constantly aims to obtain economies of scale, and must find the production level at which economies of scale turns to diseconomies of scale. • Economies of scale and diseconomies of scale are concepts that go hand in hand. They both refer to changes in the cost of output as a result of the changes in the levels of output. • A company would have achieved economies of scale when the cost per unit reduces as a result of an expansion in the firm’s operations. • Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale, at which the cost per unit rises as more units are produced. Purchasing these types of economies: As we stressed previously in the discussion of economies of scale, changing input prices cannot be the cause of scale economies or diseconomies because, quite simply, input prices remain constant along any particular LAC curve. So what does happen to a firm’s long-run costs when input prices change? As it turns out, the answer depends...
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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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...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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...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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...The long run cost curve for most firms is assumed to be ‘U’ shaped, because of the impact of economies and diseconomies of scale. However, economic theory suggests that average costs will eventually rise because of diseconomies of scale. Types of economy of scale 1. Technical economies are the cost savings a firm makes as it grows larger, and arise from the increased use of large scale mechanical processes and machinery. For example, a mass producer of motor vehicles can benefit from technical economies because it can employ mass production techniques and benefit from specialisation and a division of labour. 2. Purchasing economies are gained when larger firms buy in bulk and achieve purchasing discounts. For example, a large supermarket chain can buy its fresh fruit in much greater quantities than a small fruit and vegetable supplier. 3. Administrative savings can arise when large firms spread their administrative and management costs across all their plants, departments, divisions, or subsidiaries. For example, a large multi-national can employ one set of financial accountants for all its separate businesses. 4. Large firms can gain financial savings because they can usually borrow money more cheaply than small firms. This is because they usually have more valuable assets which can be used as security (collateral), and are seen to be a lower risk, especially in comparison with new businesses. In fact, many new businesses fail within their first few years because of...
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...competitive advantage primarily by reducing its economic costs below its competitors. If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm. The ability of a valuable cost-leadership competitive strategy to generate a sustainted competitive advantage depends on that strategy being rare and costly to imitate. Sources of cost advantage * Economies of scale Economies of scale One of the most cited sources of cost advantage for a firm is its SIZE.There is a relationship between firm size measured in terms of volume of production - and costs - measured in terms of average costs per unit of production. The optimal volume of production is reached when the average costs per unit of production is minimum. Sources of economies of scale : volume of production and specialized machines : Acompany with a high level of production, it is able to purchase and use specoalized manufacturing tools that cannot be kept in operation in small companies. volume of production and cost of plant and equipement : Ahigh volume of production may allow a firm to build larger manufacturing operations. Large-volume firms will be able to build lower per unit cost manufacturing operations and will have lower average costs of production. volume of production and employees specialization : High volumes of...
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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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...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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...wrong,” Chapter 4 Business-level strategies: actions firms take to gain competitvive advantages in a single market or industry. The two main strategies are cost leadership and product differentiation (known together as generic business strategies). Corporate-level strategies: actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously Cost leadership business strategy: gaining advantages by reducing costs to below those of all competitors Table 4.1 – Important Sources of Cost Advantages for Firms 1. Size differences and economies of scale 2. Size differences and diseconomies of scale 3. Experience differences and learning-curve economies 4. Differential low-cost access to productive inputs 5. Technological advantages independent of scale 6. Policy choices Size differences and economies of scale: exist when the increase in firm size (measured by volume of production) is associated with lower cost (measured by average costs per unit of production). High volume of production may...
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...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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...00 l) $18.00 4) Which of the curves above best represents a typical average variable cost curve? m) A n) B o) C p) D 5) The production method that produces a given level of output at the lowest possible cost is considered: q) economically efficient. r) allocatively efficient. s) technically efficient. t) profitably efficient. 6) The envelope relationship in chapter 13 describes: u) the relationship of management to workers. v) the relationship between the long run average cost curve and the short run average cost curves. w) the importance of good stationary in the modern economy. x) the relationship between economies of scale and diseconomies of scale. 7) The ____________ sees opportunities to sell goods at prices higher than production costs and organizes the factors of production to make that good: y) cost curve. z) government. {) entrepreneur |) consumer. 8) The graph above shows a...
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...Cost Leadership Strategies gaining advantage by reducing its economic costs below all of its competitors. 1. What are the major sources of cost advantages? a. Size differences and economies of scale: Exist when AC(Q)↓=TC(Q)/Q↑, until reach to optimal volume of production * Volume of Production and Specialized machines: Only big volume company has the ability to buy new machines to save cost. * Volume of Production and Cost of Plat and Equipment: Volume↑, per-unit-cost manufacturing operations↓ * Volume of Production and Employee Specialization: Volume↑, employment more specialized, cost↓ * Volume of Production and Overhead Costs b. Size differences and diseconomies of scale: when other firms grow beyond the optimal firm size, a smaller firm (which a level of production closer to the optimal) may obtain a cost advantage. * Physical limits to efficient size * Managerial diseconomies: too large to manage efficiently * Worker motivation * Distance to Market and Suppliers: transportation cost is too expensive and eat up those profit. c. Experience differences and Learning-curve economies: cumulated volume of production greater experience in manufacturing a product or service cost↓ * Learning curve vs economic scale: a) cumulated volume vs the volume at a given point in time and average units cost. b) Optimal volume affects cost per unit vs No optimal volume affects cost per unit * The learning curve and competitive...
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