Economies of scale
Flow
1) Examples how economies of scale is helpful,
2) New technology and economies of scale.
3) Critic of economies of scale.
4) Economies of scope(From PDF)
5) Govt initiatives to achieve economies of scale.
Economies of scale:
The change in long run average cost as output increases is the basis of economies of scale. A firm enjoys economies of scale in a situation where average cost goes down when output goes up while if the average cost increases with the increase in output then it is diseconomies of scale. The extent of economies of scale can affect the structure of an industry. Economies of scale can also explain why some firms are more profitable than others in the same industry, Claims of economies …show more content…
The size of MES relative to the size of the market often indicates the significance of economies of scale in particular industries. The larger MES is in comparison to overall market sales, the greater the magnitude of economies of scale.
Case Study 1: Economies Of Scale In Refining Alumina?
Manufacturing aluminum involves several steps, one of which is alumna refining. Alumina is a chemical compound consisting of aluminum and oxygen atoms(Al¬2¬O¬3)¬¬¬. Alumina is created when bauxite ore-the basic raw material used to produce aluminum- is transformed using a technology known as Bayer process.
There are substantial economies of scale in the refining of alumina. Table 1.1 shows estimated long run average costs as a function of the capacity of an alumina refinery. As plant capacity doubles from 150,000 tons per year to 300,000 tons per year, long run average cost declines by about 12%. Stuckey reports that average costs in alumina refining may continue to fall up to capacities of 500,000 tons per year.
Table 1.1 Plant Capacity and Long-Run Average Cost in Alumina …show more content…
Therefore, if marginal cost is always less than average cost, then average cost will always be decreasing.
Economies of scope
Economies of scope is a term that refers to the reduction of per-unit costs through the production of a wider variety of goods or services. Economies of scope and economies of scale are conceptually similar. Whereas economies of scale for a firm primarily refers to reductions in the average costs associated with increasing scale of production for a single products type, economies of scope refers to lowering the average cost for a firm producing two or more products.
How it Works:
Let’s assume company XYZ strictly manufactures vaccum cleaners. What would happen if the company decided to branch out into brooms? Adding brooms to the product line would allow XYZ to spread certain fixed costs over a larger number of units. Thus, the company could reach more customers with its advertising budget, its sales force could be used to sell both products, broom could be stored and shipped from the firm’s existing vacuum brushes for its vacuums. Furthermore, XYZ could then market itself as a “Cleaning Products” company than just a “Vaccum
Flow
1) Examples how economies of scale is helpful,
2) New technology and economies of scale.
3) Critic of economies of scale.
4) Economies of scope(From PDF)
5) Govt initiatives to achieve economies of scale.
Economies of scale:
The change in long run average cost as output increases is the basis of economies of scale. A firm enjoys economies of scale in a situation where average cost goes down when output goes up while if the average cost increases with the increase in output then it is diseconomies of scale. The extent of economies of scale can affect the structure of an industry. Economies of scale can also explain why some firms are more profitable than others in the same industry, Claims of economies …show more content…
The size of MES relative to the size of the market often indicates the significance of economies of scale in particular industries. The larger MES is in comparison to overall market sales, the greater the magnitude of economies of scale.
Case Study 1: Economies Of Scale In Refining Alumina?
Manufacturing aluminum involves several steps, one of which is alumna refining. Alumina is a chemical compound consisting of aluminum and oxygen atoms(Al¬2¬O¬3)¬¬¬. Alumina is created when bauxite ore-the basic raw material used to produce aluminum- is transformed using a technology known as Bayer process.
There are substantial economies of scale in the refining of alumina. Table 1.1 shows estimated long run average costs as a function of the capacity of an alumina refinery. As plant capacity doubles from 150,000 tons per year to 300,000 tons per year, long run average cost declines by about 12%. Stuckey reports that average costs in alumina refining may continue to fall up to capacities of 500,000 tons per year.
Table 1.1 Plant Capacity and Long-Run Average Cost in Alumina …show more content…
Therefore, if marginal cost is always less than average cost, then average cost will always be decreasing.
Economies of scope
Economies of scope is a term that refers to the reduction of per-unit costs through the production of a wider variety of goods or services. Economies of scope and economies of scale are conceptually similar. Whereas economies of scale for a firm primarily refers to reductions in the average costs associated with increasing scale of production for a single products type, economies of scope refers to lowering the average cost for a firm producing two or more products.
How it Works:
Let’s assume company XYZ strictly manufactures vaccum cleaners. What would happen if the company decided to branch out into brooms? Adding brooms to the product line would allow XYZ to spread certain fixed costs over a larger number of units. Thus, the company could reach more customers with its advertising budget, its sales force could be used to sell both products, broom could be stored and shipped from the firm’s existing vacuum brushes for its vacuums. Furthermore, XYZ could then market itself as a “Cleaning Products” company than just a “Vaccum