• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The impact of economies and diseconomies of scale Tesco face

Extracts from this document...

Introduction

The impact of economies and diseconomies of scale Tesco face As businesses grow and their output increases, they commonly benefit from a reduction in average costs of production. Total costs will increase with increases in output, but the cost of producing each unit falls as output increases. This reduction in average costs is what gives larger firms a competitive advantage over smaller firms. This fall in average costs as output increases is known as Economies of Scale. Tesco benefit from economies of scale because they are constantly opening new stores around the country, such as their new store in Stockport. Therefore, they are always increasing their output, and so benefit from lower average costs. That is why Tesco seem to have the monopoly is supermarkets, as they have an advantage over smaller supermarkets such as Morissons, who do not buy as much quantity. In the short run, Tesco benefit from economies of scale by selling in bulk. They do this using special offers, such as 'If you spend �50, you get 5p per litre off your fuel' and also 'Buy one get one free'. ...read more.

Middle

One of these internal economies of scale is purchasing. As Tesco continue to grow, they increase the size of their orders for raw materials. This results in the cost of each individual component purchased will fall. This will therefore reduce the average cost of production. Another internal economy of scale from which Tesco benefit is technical. As they grow, they are able to use the latest equipment and incorporate new methods of production. An example of is their new self-service checkouts from which people can purchases their goods from a machine using a scanner. This increases efficiency and productivity, reducing average costs of output because it means they don't have to employ as many workers. Other internal economies of scale include finances, because Tesco have enough financial backing, it means they do not have to borrow money and pay interest on that money as smaller supermarkets do. Tesco also employ managers who specialise in different areas. These managers will know how to get the best value for each � spent, whether it is in production, marketing or purchasing. ...read more.

Conclusion

In Tesco, as there are so many workers, the manger may not be able to see if everyone is doing their job. This then means Tesco are suffering from diseconomies of scale. This diseconomy is internal, meaning it is a problem that can be controlled by the company. Internal diseconomies of scale are often qualitative in nature, hard to measure financially, but can still reduce the efficiency of Tesco. An external diseconomy may be the competition of labour. As there are so many firms in Manchester, it means it is harder for them to recruit the best workers and also keep them. Another external diseconomy of scale is increasing employment costs. More supermarkets means that Tesco eventually pay more wages as there is more demand for labour, hence increasing the average costs with output. Overall, we can see that Tesco suffer from both economies and diseconomies of scale. I feel that Tesco benefit more from economies of scale, even though they suffer from diseconomies of scale. The reason is that as they increase their output there is significant changes in their average costs to account for the diseconomies of scale which only slightly increase the average costs. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Here's what a star student thought of this essay

4 star(s)

Response to the question

This essay responds superbly to the question, giving a strong insight into economies of scale and diseconomies of scale. I liked how they recognised the difference between internal and external economies of scale, but I would've liked to have seen ...

Read full review

Response to the question

This essay responds superbly to the question, giving a strong insight into economies of scale and diseconomies of scale. I liked how they recognised the difference between internal and external economies of scale, but I would've liked to have seen this briefly summarised in the introduction to make their understanding clear. A clear diagram showing how average costs decrease (economies of scale), and then increase (diseconomies) as output increases would have made this essay stronger.

Level of analysis

The analysis in this essay is sound, but each example of economies of scale could be explained better. For example, when talking about purchasing economies of scale, you could reference a simple demand diagram showing how a large quantity should result in a lower sale price. If I were doing this essay, I would explore the concept of skilled managers. Large firms are able to attract talented employees and so become more productively efficient. This essay mentions efficiency quite regularly, but using technical terms such as productive or allocative efficiency would show higher level understanding. When talking about diseconomies of scale, I would recommend talking about the structure of the firm becoming more disjointed, and thus production isn't as efficient. I am unsure about their point of wages, as generally Tesco hire shop workers with low skills and pay them low wages. If the demand for workers increase, it is unlikely the wages will increase significantly, especially due to the unemployment numbers at the minute. Such discussion would be perceptive and gain credit. I would've liked to have seen some awareness of the effect economies of scale can have on competitors. As Tesco benefits from economies of scale, it acts as a barrier to entry for new firms trying to enter the market, ensuring Tesco maintain their market share.

Quality of writing

This essay is structured well, having a clear introduction and conclusion. I liked how each economy of scale was tackled separately, and there was a clear progression from economies of scale to diseconomies of scale. There are a few instances of slips in spelling, punctuation and grammar such as "benfit" which could be removed after a proof read. I would recommend trying not to use the first person, as this sounds less sophisticated and more opinion based. Using phrases such as "it is clear from the analysis shown" will make your argument more convincing.


Did you find this review helpful? Join our team of reviewers and help other students learn

Reviewed by groat 26/02/2012

Read less
Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Marked by a teacher

    Would It Be Economically Beneficial to Britain to Introduce An Obesity Tax?

    5 star(s)

    This is due to the fact that the majority of people employed in highly active jobs such as farming have fallen substantially therefore people are no longer being paid to expend calories but have to pay instead. While they explain the rise in obesity through the 1980's we can't account that for the continuing rise since 1990.

  2. Discuss the internal and external causes of the debt crisis, with specific reference to ...

    The banks felt no effect as their governments bailed them out fearing repercussions on their own economies. There was lack of access to international capital markets for trade credit and less export meaning less access to foreign currency. Economists Eaton and Gerositz argued that banks should had lent to a

  1. Features of command economies

    The consumption is determined by consumers. So there are initiatives of investment in every company. Companies compete with each other and the technical is progressed. There are initiatives of investment in every company. People work harder than before since the competition also happens between them.

  2. Evaluate the impact of Nike's outsourcing strategy and factory location on the host nation

    In which case it could be argued therefore that a transfer of technology from multinational operations will not benefit the host nation. The argument that the host nation will benefit from reduced unemployment if a multinational firm invests in that country can be countered as investment in less developed countries

  1. Discuss the policy options the Australian Government can use to achieve external stability

    Exporters are already arguing that the RBA should reduce the gap between Australian and overseas interest rates, in order to ease the upward pressure on the dollar. The most effective instrument to influence Australia's external performance in the past two decades has been microeconomic reform, which are actions taken by

  2. Outsourcing. From the us point of view, how large is the outsourcing phenomenon and ...

    The automobile sector is not the only one being outsourced in the US. Some high tech companies such as Samsung are implanting into the US. Samsung will pour about $500 million into improving his facilities in Texas and will create 300 jobs through 2006.

  1. Use game theory to analyze an oligopoly competition of two great rivals, Wal-Mart and ...

    However, the stock value meanwhile has increased from 4700000 to only 17500000 dollars, - this makes 272%. Wal-Mart has a proficient storage management system which allows it to replenish goods twice a week and reduce storage space and delivery time further.

  2. Monetary policy of a globalised economy

    India has become the home of business process outsourcing. There has been evidence which shows that most major goods producing industries resort to some or the other kind of slicing up of their work. The second part of globalization is the increased integration of financial markets.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work