Economies of Scale: Wal-Mart. Economies of scale means declining average cost when volume increases.

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Economies of Scale: Wal-Mart

Economies of scale means declining average cost when volume increases.

When the marginal cost is less than average cost, there are economies of

scale. For example, an IT company spends a huge fixed cost to develop

software and marginal cost of producing a CD compare with the fixed cost can

be considered as small and unimportant, so before capacity constraints kick in,

the average cost will decline as fixed cost are spread over lager volumes.

Economies of scope refers to cost savings when different goods or services

are produced “under one roof”. For example, there are two products: A and B.

If the cost of producing A and B together is smaller than producing them

separately we can say there are economies of scope.

Here, we use Wal-Mart as an example to explain the sources of economies of

scale and diseconomies of scale.

The most common source of economies of scale is the spreading of fixed

costs over an ever-greater volume of output. Fixed costs arise when there are

indivisibilities in the production process. Indivisibility simply means that an

input cannot be scaled down below a certain minimum size, even when the

level of output is very small.

Since Wal-Mart is a hypermarket, in a certain area it needs a warehouse and

also needs some trucks use to delivery their goods. The cost for renting

warehouse and buying trucks belong to fixed cost. But Wal-Mart is so big and

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has so many locations, so the fixed cost can be spread over its huge volume of

outputs. Then it can achieve economies of scale.

Second resource of economies of scale may be increased productivity of

variable inputs, such as specialization of labor and efficiencies in energy

usage. Wal-Mart has so many locations around the world. There is the market

that is big enough to support it to make specialized investment. For example,

specialization of labor can increase their efficiency and then reduce the cost.

There is a group of people who are customer specialization. They offer a good

after ...

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