The impact of economies and diseconomies of scale Tesco face
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. Tesco also benefit from economies of scale in the long run, because as
Outline briefly- with a diagram, the key economies and diseconomies of scale, both internal and external. How useful is the whole concept of Economies of Scale?
ECONOMICS ESSAY ECONOMIES AND DISECONOMIES OF SCALE QUESTION: outline briefly- with a diagram, the key economies and diseconomies of scale, both internal and external. How useful is the whole concept of Economies of Scale? Economies of scale: a basic introduction Economies of scale in simple words are the cost advantages of a business (the money it saves) when it expands. As we know, a company has two main costs: fixed cost and variable cost. When it increases its fixed costs to expand the business, its efficiency and production increases, and the costs incurred are shared by the increased number of goods, thus lowering the average cost per good. In simpler words...economies of scale is the situation of a company when its average costs per unit decrease due to an increase in production. One benefit of such a situation is that due to lower costs of production, the monetary burden on the consumer decreases, thus enabling the company to increase its market share. An alternative is if the company wants to maintain its current prices. The advantage here is that it can benefit from larger profit margins. For example: a soft-drink company can produce 100 bottles of the drink a day at a total cost of Rs. 3000. Thus the average cost per unit is (3000/100) = Rs. 30. The company then imports a machine costing Rs. 2500 which increases the rate of production. Now, in the same Rs. 3000,
Economies of scale
ECONOMICS ESSAY 2 To a firm, it aims at maximize profit. When firm increasing the scale of production during long run, it can experience the economies of scale in which average cost is decreasing. Although increasing size can bring many advantages, it also brings disadvantage like diseconomies of scale. In this essay, I am going to talk about how economies of scale are mostly technical, tangible and visible and how diseconomies of scale are mostly human, intangible and invisible in the first part. Since diseconomies of scale arise from managerial problem, so in the second part, I am going to discuss the implication of business management. For example, how to get benefit of economies of scale and to decrease the diseconomies of scale. The economies of scale that is focusing in this essay is internal economies of scale. 'Internal economies of scale are those which arise from the growth of the firm independently of what is happening to other firms. They are not due to any increase in monopoly power or to any technological innovation; they arise quite simply from an increase in the scale of production in the firm itself.' (Stanlake & Grant P.64) When a firm increasing the output and make the average cost lower. This firm experiences the economies of scale. Economies of scale only arise in long run because all factors are variable. In the theory of economies of scale, it assumes
Economies of Scale
Economies of Scale These occur when mass producing a good results in lower average cost. Economies of scale occur within an firm (internal) or within an industry (external). Internal Economies of Scale These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of: * Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively. * Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc. * Financial economies made by borrowing money at lower rates of interest than smaller firms. * Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output. * Commercial economies made when buying supplies in bulk and therefore gaining a larger discount. * Research and development economies made when developing new and better products. External Economies of Scale These are economies made outside the firm as a result of its location and occur when: * A local skilled labour force is available. * Specialist local back-up forms can supply parts or services. * An area has a good transport network. * An area has an excellent reputation for producing a
Economics questions - economies of scale.
Economics Test . Define and explain all Internal Economies of Scale: * Internal Economies of Scale: Are reductions in long-run average cost as the size and output of a firm increases. In other words, they are advantages that large firms have because they are large. As they grow larger in the long-run they manage to raise their output faster than the rise in their total costs. The result is lower long-run average cost. - Marketing economies - Both in buying materials and selling its finished goods a large firm is n a better position than a smaller one. In buying the products it needs, the large firm often pays less for raw materials, machinery and so on because suppliers are sure they are going to get large orders and do not want to lose a big customer. E.g. A producer of shoelaces will sell its products for £1 per packet to Nike because it has an order of 1000 packets per week. But for Adidas it will sell them £2 because it has only an order of 100 packets per week. So Nike has a lower cost per packet compare to Adidas. In selling its products, Nike can afford to pay for expensive and professionally made advertisements or employ specialist salesmen much easier than Adidas. The large total cost of advertising can be spread over a large output that is sold. Therefore, the average cost of advertising will be low. - Financial economies - If Nike is going to borrow money
Economies of Scale: Wal-Mart. Economies of scale means declining average cost when volume increases.
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
As a leading authority on costs, you have been asked by the President of the Manufacturing Consortium Forum (MCF, Sumitomo Yoshimitsu), to prepare a speech in which you discuss economies of scale and diseconomies of scale and their respective sources.
As a leading authority on costs, you have been asked by the President of the Manufacturing Consortium Forum (MCF, Sumitomo Yoshimitsu, to prepare a speech in which you discuss economies of scale and diseconomies of scale and their respective sources. Sumitomo would also like you to explain how costs differ in the short run from long run costs and what may cause them to change in both the short run and the long run. The term 'economies of scale' is used when a company's cost per unit of output falls as a result of the company's scale of production increasing. The cost per unit of output is the average overall cost of producing a single unit. All cost factors must be taken into account, such as overheads, labour, rents and rates. If the cost per unit of output exceeds the average cost per unit then the company will be making a profit, which is the main objective in business. The scale of production determines how proportional the increase in input is to the increase in output. You may ask yourself; if Sumitomo Yoshimitsu were double all of its inputs would they necessarily double all of their outputs? This is where scale of production plays a part. A basic example of economies of scale would be where a minor retail outlet currently ordering fifty cassette players per week for £500.00 at £10.00 per unit, decides to order twenty weeks worth of cassette players all at once.
Economies of scale.
CONSTANTZA MARITIME UNIVERSITY MARITIME AND MULTIMODAL TRANSPORT MANAGEMENT Class of 2003/2004 BASES OF TRANSPORT ACTIVITIES - ECONOMICS OF SHIPPING TAKE HOME EXAMINATION STUDENT DUMITRU CARAGHEORGHE CONSTANTA 2004 TASK 1 In economics, the term economies of scale refers to a situation where the cost of producing one unit of a good or service decreases as the volume of production increases. Economies of scale tend to occur in industries with high capital costs in which those costs can be distributed across a large number of units of production. The exploitation of economies of scale helps explain why companies grow large in some industries, why marketplaces with many participants are sometimes more efficient and how a natural monopoly can often occur. It is also a justification for free trade policies, under the idea that a large unified market presents more opportunities for economies of scale. There is a multitude of advantages conffered by the economy of scale. These include: (a) Indivisibilities in inputs. When inputs are lumpy in nature or non-rival in consumption they are, at least in part, independent of scale and their costs can be spread over a larger level of output resulting in lower unit costs. Such inputs include capital, R&D and advertising. (b) Specialization in inputs: When the scale of the plant or the firm increases, opportunities for
Give an appraisal of the concepts of economies of scale and minimum efficient scale. Explore the relevance of these phenomena for market structure and market power.
Give an appraisal of the concepts of economies of scale and minimum efficient scale. Explore the relevance of these phenomena for market structure and market power. This essay seeks to discuss the effects that both economies of scale and minimum efficient scale has on market structure and market power. The first part will typically analyse the two terms and highlight the analysis with appropriate examples and graphics. The second part will tie in part one and with examples and graphics again to show how both market structure and market power is affected. This essay is looking at everything through a long term perspective; in the long run for a firm there is no fixed factor of production. Firms can choose any level of production they wish; they can double, treble or cease production altogether. Economies of scale refers to the relationship between inputs and outputs. This occurs when a given percentage rise in the production of output requires a smaller percentage rise in the input process. The term Economies of Scale refers directly to the reduction in cost per unit of output that follows from larger scale production. An increase in output doesn't always mean a smaller increase in the input process. When average costs don't change with the scale of production there are constant returns to scale. When an increase in the production process leads to higher average
Economic Theory - The Short and the Long Run & Economies of Scale
HNC Management Assignment By Vikki Carpenter Economic Theory The Short and the Long Run & Economies of Scale Reference: MicroEc' Outcome 2 pc(a) Give short written answers to the following questions (1) In economic theory what is the definition of: a: The Short Run The short run is a period of time when there is at least one fixed factor of production i.e. a factor input that cannot be altered. This is usually fixed capital such as machinery, the amount of factory space available, staff issues or even the area of land being leased or owned. In the short run a firm will have fixed and variable costs of production. Total cost = fixed cost + variable cost. b: The Long Run In the long run, all factors of production will be variable, for example a company may wishes to expand so they may take on additional premises, or staff levels may increase to cover increase productivity. (2) Explain in your own words, what may happen to a firm's average costs of production in the short run and long run. As a firm starts its production or services it creates its first SAC (short run average cost curve), this is shown in diagram by curve SAC1. Once it becomes successful it will increase size, staff, output etc and each time its fixed factor cost changes as the production output changes (rent, staff costs, raw materials etc) a new SAC begins (represented by SAC
