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How firms benefit from economies of scale? (mod 4 SLP)

Essay Instructions:

Module 4 - Background

SUPPLY: PRODUCTION, COSTS, AND PROFITS

Production and Costs in the Short Run

In microeconomics, we assume that all firms operate to maximize profit. Profit is calculated by subtracting total costs from total revenue. In the short-run, a firm has fixed and variable costs. We assume that labor is variable (workers can be hired and fired at any time) while capital is fixed (usually capital such as factory equipment, rent on a wherehouse is on a timed lease).

Required Reading

Bouman, John. Principles of Microeconomics. "Unit 5: Cost Functions" Retrieved from: http://www(dot)inflateyourmind(dot)com/pdfs/microeconomics.pdf

Bouman, John. () Principles of Microeconomics. "Unit 6: Profit maximization of a Purely Competitive Firm" (Sections 1-6 only) Retrieved from:http://www(dot)inflateyourmind(dot)com/pdfs/microeconomics.pdf

Note: This chapter will be used in module 5 as well.

PowerPoint Presentations

Supply and Production This PDF file takes a few seconds to download.

Costs of Production

Other Resources

Economics Web Institute. Costs. Retrieved from:http://www(dot)economicswebinstitute(dot)org/glossary/costs.htm

Note: All readings were validated on March 17, 2013.

Module 4 - SLP

SUPPLY: PRODUCTION, COSTS, AND PROFITS

Profits and Your Franchise Firm

In this module, we have explored the costs of production which have a direct impact on the profit of your firm. Write an essay that addresses the following questions.

  1. How do firms benefit from economies of scale?
  2. What might be some potential disadvantages of being part of a large corporation?
  3. Suppose business is booming at your firm. It is contemplating adding more capital, but the day supervisor suggests simply hiring more workers. How should the you decide which alternative to pursue?

SLP Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Please be sure to cite all sources within the text and a reference list at the end of the paper.

Length: 2–3 pages double-spaced and typed.

The following items will be assessed in particular:

  • Your ability to explain how different economies vary in production.
  • Some in-text references to the modular background readings (APA formatting not required).
  • The essay should address each element of the assignment. Remember to support your answers with solid references.
Essay Sample Content Preview:

Economics Mode 4 SLP
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How firms benefit from economies of scale
Business enterprises reap certain advantages from economies of scale as a result of decrease in the cost of producing of each unit product. This is due to the benefits realized from the increased bulk production, output and firm size (John, n.d). This means that for a company to enjoy economies of scale there is a particular condition that must be satisfied. There should be a significant reduction in the average total cost (ATC) while the output increases over the long term (Piana, 2013). ATC is calculated by dividing the sum of the fixed cost (FC) and variable cost (VC) by the total output (Q):
AVC=FC+VCQ
For a firm to enjoy economies of scale, it must produce more output than the investment or input that was injected into the production. This implies that if a company currently produces 200 units of a given product by employing 20 workers and 5 machines, it must be to produce more than 400 units if it doubles its workforce and the machines. As such, a firm that produces 450 units would be said to be enjoying economies of scale. A firm is thus able to produce more goods and services in huge quantities incomparably lower costs.
Economies of scale provide a company with a competitive edge over its competitors. This is due to the ability to produce goods and services at a lower cost (Jain & Ohri, 2010). As such, the firm is able to sell its products at competitive and lower prices than its competitor companies. In some instances, the reduction in the prices may also trigger a monopolist's market where the firm is the sole price setter. In addition, economies of scale enable a firm to adopt better technologies as well as increase the specialization of the workers. This leads to improvement in efficiency, thus enabling the firm to have better productivity, thereby increasing the quantity and quality of goods or services produced (McEachern, 2013). For example, a firm that was previously relying on manual labor to produce its products will be able to produce more and better quality products when it employs technology such as automation of operational processes.
Potential effects of being part of a large company
Diseconomies of scale come about when both the long term average total cost and the levels of output increases simultaneously (Tutor2u, n.d). A large corporation can be affected by diseconomies of scale which will eventually trickle down to the affiliated companies. These effects are a consequence of increasing complexity of the business as it continually expands. Rise in the cost of communication has been identified as a cause of diseconomies of scale. This is due to the increase in complexity of communication as the number of...
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