2. 2
Economics :
Economics is the study of how people choose to use resources.
1. Time and Talent people have available,
2. The land, building, equipment, and other tools on hand and
3. The knowledge of how to combine them to create useful products
and services.
3. Scale:
Pattern, Set, Measure, or Estimate according to
some rate or standard.
3
Or
The proportion between two sets of Dimensions.
6. Internal and External Economies of Scale
Internal : When a company reduces costs and increases
production,
External : occur outside of a firm, within an industry.
6
22. For example: McDonalds can produce both hamburgers and
French fries at a lower average cost than what it would cost two
separate firms to produce the same goods. This is
because McDonalds hamburgers and French fries share the use of
food storage, preparation facilities, and so forth during production.
22
Example of Economies of Scale
23. Why It Matters ?
When a company can effectively scale its business and cut
costs on a per-unit basis, this often gives it the flexibility
to:
Drop its prices
Charge the same amount and pocket a higher profit
Or some combination of two
23
24. 24
Is Bigger Really Better?
As businesses get bigger, the balance of power
between demand and supply could become weaker,
thus putting the company out of touch with the needs
of its consumers. Moreover, it is feared that
competition could virtually disappear as large
companies begin to integrate and the monopolies
created focus on making a buck rather than thinking
of the consumer when determining price.
25. 25
Conclusion
The key to understanding ES and DS is that the sources vary. A
company needs to determine the net effect of its decisions affecting its
efficiency, and not just focus on one particular source. Thus, while a
decision to increase its scale of operations may result in decreasing the
average cost of inputs (volume discounts), it 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. Thus, when making a strategic decision to expand, companies
need to balance the effects of different sources of ES and DS so that the
average cost of all decisions made is lower, resulting in greater
efficiency all around.
