The impact of economies and diseconomies of scale Tesco face

Authors Avatar

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’. These offers encourage us, the consumers, to buy in bulk. This means Tesco are benefiting from economies of scale as they are selling more quantity of their products, and are then able to buy more, and hence reduce their average costs.  

Join now!

        Tesco also benefit from economies of scale in the long run, because as they are opening more stores, it means they are employing more and more people, who may otherwise be unemployed. The council recognise this, and therefore give Tesco cheaper council tax on their property, because of the employment of all these people. Another way in which they benefit is whit their building contractors who build their stores. They give them lower prices as they are buying in bulk (building so many new stores), and are hence benfiting from economies of scale in this way. The final way in ...

This is a preview of the whole essay

Here's what a star student thought of this essay

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.

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.

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.