The Economic Environment of Business - Desklib

Running head: THE ECONOMIC ENVIRONMENT OF BUSINESS
The Economic Environment of Business
Name of the Student
Name of the University
Author Note

1THE ECONOMIC ENVIRONMENT OF BUSINESS
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................4
Answer 3:...................................................................................................................................5
Answer 4:...................................................................................................................................6
Answer 5:...................................................................................................................................8
a).............................................................................................................................................8
b)..........................................................................................................................................10
References:...............................................................................................................................13

2THE ECONOMIC ENVIRONMENT OF BUSINESS
Average cost
Output
C0
C1
Q0 Q1
Answer 1:
Economies of scale implies per unit cost reduction that occurs when firm increases its
total output of any product. Economies of scale can be increased for various reasons, such as,
labour specialisation and technological improvement, huge orders come from suppliers and
distributing costs of internal function across units produced by large amount (Baumers,
Dickens, Tuck and Hague 2016). Internal function costs include information technology,
accounting and marketing costs.
Figure 1: Economies of scale
Source: (created by author)
The above figure represents economies of scale, where average cost of a firm
decreases by C0C1 unit when total production increases by Q0Q1 unit. Large European
airlines, such as, the British Airways can receive benefits from this economic concept as well.
In Airlines Companies, economies of scale occur when demand for ticket increases and this
in turn distributes total costs among total number of services. To increase demand and
provide more services to passengers, airlines companies follow various strategies provide

3THE ECONOMIC ENVIRONMENT OF BUSINESS
Average cost
Output
C0
C1
Q0 Q1
more flights, for instance, airlines companies adopt optimisation process to sell tickets,
reduction of in-flight meal, consolidations and alliances (Urban, Klemm, Ploetner and
Hornung 2018). According to economists, this economic concept occurs when a firm
increases its level of production. However, some researchers have found that economies of
scale lead costs to decrease further but turnover growth remains almost same. Thus, large
airline companies like the British Airways can benefit from economies of scale if it does not
lose the identity after increasing of its flight demand. This means, economies of scale can be
applicable for this large company if it does not compromise the service quality (Holloway
2017). Thus, maintaining standard quality is essential for these companies even they follow
complex provider structure. The British Airways obtain their economies of scale when it
merges with Iberia of Spain. This merger helps both companies to maintain the brand value
and heritage to their passengers at the time of obtaining significant synergies by making a
combined force (Doganis 2013). These companies have reduced their costs successfully
through decreasing the costs of staff or by cutting some unprofitable destinations.
Diseconomies of scale occur when costs per unit and business grow simultaneously.
This is situation occurs when economies of scale do not operate for the firm (Shao 2018).