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Economies of Scale. Some firms become large by enjoying the EOS, however many prefer to remain small. Explain this statement.

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Introduction

´╗┐Question ; Some firms become large by enjoying the EOS, however many prefer to remain small. Explain this statement. [25m] Economies of Scale refers to the benefits that the firms enjoy by combining the resources in the best way possible. In other words, as input rises the output will be rising at increasing rates. A firm can enjoy the Economies of Scale when they are able to reduce the long run average cost by producing in large scale. There are two types of Economies of Scale which are internal and external. Firstly in the internal economies of scale, it refers to the benefits enjoyed by a firm from the actions it takes. There is the technical Economies of Scale whereby large firms invests in very large and sophisticated machines and equipment, this is where they may enjoy high output, high quality and less pilgerage at lower costs. The large firms enjoy economies of indivisibility from capital. Other than that, there is also the market economies of scale where the large firms enjoy a lot of benefits by bulk ...read more.

Middle

Economies of information where information is accessible and important through the internet, multimedia, government budget planning and so on. This helps to increase output and minimize the cost which will enjoy the economies of scale. There is also the economies line process, as the firms expand, they could diversify either forward or backwards to ensure a steady supply of raw materials, a steady market. This ensures the less interruption in the production and distribution. When the large firms can reduce in the long run, they could sell the products at a lower price and therefore the firm is able to compete with the rivals by reducing the price. This captures a bigger market share and could gain bigger power as well. However, a firm does not have to grow through economies of scale only. It could grow through other methods such as internal and external growth whereby the profits would grow bigger. This is suitable for large firms such as banking, oil and gas companies and monopoly structure market. ...read more.

Conclusion

Furthermore, there is the problem of specialized skills of the owners as not everybody would be able to reach to an expected level of the business. There are also profits which the firms would like to retain. Small firms keeps their profits and does not share profits with anybody, this may able them to have full control of their business. Next, the small firms may not have enough capital to expand their firms because they lack of economies of scale and to enjoy economies of scale, they require a large quantity of the product or labour. Furthermore, there are small firm businesses whereby the owners may not plan to expand their business as they may lose control of the management to other people for example, family business. In conclusion, firms prefer to stay small due to the fact that it is easier to handle and to manage unlike the larger firms which may have difficulties as they have a larger quantity of product and labour to manage. ...read more.

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