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Celebrating the learning: sOME FANTASTIC EXAMPLES OF LAST WEEKS LEARNING ON THE SIZE AND GROWTH OF FIRMS... |
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Week 4: ECONOMIES AND DISECONOMIES OF SCALE
WHAT: ECONOMIES AND DISECONOMIES OF SCALE
HOW: ANALYSE HOW INTERNAL AND EXTERNAL ECONOMIES OF SCALE AND DISECONOMIES OF SCALE CAN AFFECT A FIRM OR AN INDUSTRY AS ITS SCALE OF PRODUCTION CHANGES WHY: BECAUSE IT IS IMPORTANT TO KNOW THAT IN THE WORLD OF BUSINESS, BIG IS OFTEN MORE EFFICIENT AS BIG FIRMS ARE LIKELY TO HAVE LOWER AVERAGE COSTS AND THEREFORE BIG FIRMS ARE LIKELY TO HAVE ADVANTAGES ON PRICE OVER SMALLER FIRMS |
INTRODUCTION: As a firm grows in size it is able to benefit from lower average costs of production. Why is this? This is because of the economic concept of economies of scale. An example will suffice to explain why this is. Think of the simple example of a cupcake bakery. It has costs of land, labour and capital. Some of these costs will be fixed in other words they will not change with output. Examples of these fixed costs would be labour costs, you need at least one worker for the bakery whether you produce 5 cupcakes a day or 500 cupcakes a day. The same is true of rent of the shop, the rent is a fixed cost because the rent would be $1000 a month whether the bakery produced 10 or 10,000 cupcakes a month. One of the key insights as to why economies of scale exist is because as output goes up the fixed costs are spread over a greater amount of output. This is called an 'Average Cost'. The more output the lower the average cost of production as the fixed costs are spread over more unit of output. It stands to reason therefore that as a firms output grows (and as the firm grows) it's average cost per unit falls and the therefore the price which the firm can charge the consumer can fall as well making the firm more competitive and earning more revenue. The ability to exploit economies of scale is one of the main advantages of growth for a firm and why it is so important for many firms to continue to grow to remain competitive. The main ways that Economies of Scale are derived for a firm are the subject of this weeks learning:
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Fig.1 The average cost curve. As a firm grows it is able to spread it's fixed costs across more units of production. As a result the average cost of production falls AR (THE PRICE) - AVERAGE COST = AVERAGE PROFIT PER UNIT.
Average Costs= Total costs of the firm divided by the total units of the output |
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ACTIVITY 1:What are the different sources of Economies of Scale for a firm? Note taking. Use the data catcher below to take notes on the different economies and diseconomies of scale. You should use pages 212-217 of the textbook (pdf at the bottom of the webpage). You can also watch the Tutor2U video that gives a good summary of why economies of scale exist and the different types of Economies. You will find this video at the bottom of the webpage.
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| economies_and_diseconomies_of_scale.docx |
ACTIVITY 2 Match the image to the different Economies and Diseconomies of Scale: Now that you have analyzed the different types of economy and diseconomies of scale look over the following images and consider which economies and diseconomies of scale are present. Write down the letter in the data catcher used in activity 1.
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a. BMW production line
e. Tech firms of Silicon Valley
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b. Amazon warehouse
f. Some of many J & J products
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c. McDonalds workers strike
g. Super Bowl celebrity ads
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d. Energy Corridor Houston
h. Complexity of management
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ACTIVITY 3: You should now research a firm of your choice and try to identify the ways that economies and diseconomies of scale might affect the firm. You might decide to use one of the firms that you used in week 2 or 3. You should record your examples and evidence on the data catcher for Activity 1. You can find some more ideas for the firms you might research in the Powerpoint below. When you have completed your research you should have a very complete table/data catcher for activity 1.
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| economies_of_scale.pptx |
ACTIVITY 4: Complete the crossword on Firms. You can find the pdf below:
| apr_5_doc_1.pdf |
RESOURCES:
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