Firms always want some reserve capacity in order to avoid disruption of their production flow when breakdown of machinery occurs. There is growing evidence that industries learn-by-doing! If a business can sell more output, it may become progressively easier to sell even more output and reap the benefits of large-scale production. Reasons for economies of scale. In certain industries, regulation can be tighter on large firms as a result of competition law or industry specific regulation. With a natural monopoly, the long run average cost curve falls over a huge range of output, there may be room for perhaps only one or two suppliers to fully exploit the available economies of scale.
Economies of Scale Essay
This can actually increase average costs resulting in diseconomies of scale. They lead to lower prices and higher profits! Managerial – managers are on a fixed salary. Out-sourcing is a tried and tested way of reducing costs whilst retaining control over production. However, the problem is not concentrated solely in such industries.
Financial economies of scale: In many industries, it is possible for small firms to operate profitably because the cost disadvantage of them doing so is small.
Economies and diseconomies of scale
For example, a supermarket might invest in new database technology that improves stock control and reduces transportation and distribution costs. Those that oppose, as seen sometimes in the deadly demonstrations held outside World Trade Organization WTO meetings, have claimed that not only will small business become extinct with the advent of the transnational corporation, the environment will be negatively affected, developing nations will not grow and the consumer and workforce will become increasingly less visible.
They arise in the input markets and due to natural constraints, especially in agriculture and extractive industries. Adam Smith identified the division of labor scxle specialization as the two key means to achieve a larger return on production.
The diseconomoes the number of customers, more the random fluctuations of their demands tends to offset peaks and recessions, thus allowing the firm to hold a smaller percentage of its output to meet such random changes. Thus, while a decision to increase its scale of operations may result in decreasing the average cost of inputs volume discountsit could also give rise to diseconomies of scale if its subsequently widened distribution network is inefficient because not enough transport trucks were invested in as well.
The efonomies common reason for Economies of scale is that econo,ies production costs are fixed as production increseases these costs stay constant. Diseconomies being to overweigh the economies and the costs begin to rise. The minimum efficient scale MES The minimum efficient scale MES is best defined as the scale of production where the internal economies of scale have been fully exploited.
Economies of Scale Essay Example for Free – Sample words
There are many different types of economy of scale. A larger organisation is harder to monitor, it is more complex and therefore co-ordination between different departments and divisions becomes more difficult.
These are pecuniary diseconomies. The latter are also important costs. They could stem from inefficient managerial or labor policies, over-hiring or deteriorating transportation networks external DS. But andd of scale also give a business a competitive advantage in the market-place.
Economies and Diseconomies of Scale | Essay | Economics
Besides, own transport facility prevents delays in transporting goods. Similar considerations hold for other types of selling activities, such as the salesmen force, the distribution of samples, etc. Internal economies of scale IEoS Internal economies of scale arise from the long term growth of the firm itself.
Sorry, but copying text is not allowed on this site. Firms always want some reserve capacity in order to avoid disruption of their production flow when breakdown of machinery occurs.
Recruitment and retention of the most productive and effective employees makes a sizeable difference to corporate performance in the long run as does the flexibility to fire those at the opposite extreme!
When a company buys inputs in bulk, say for example potatoes used to make French fries at a fast disecnomies chain; it can take advantage of volume scals. An example of this is the computer software business. Personal contacts and communication between owner and managers and managers and labour get rapidly reduced.
Diseconomies of acale can also occur for reasons external to a firm.