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Economies of Scale - Assignment

   

Added on  2019-11-25

6 Pages1169 Words183 Views
Running head: ECONOMICS Economics NameInstitution Affiliation

ECONOMICS2Economies of ScaleEconomies of scale refer to the advantages that accrue to a company due to the increase in the scale of production. The overall aim of expanding production is to increase output with a decrease in the overall average costs associated. The low costs enable the firm to operate in production efficiency which allows them competitive advantage in production. This allows for lowerprices and higher profits in turn since the costs of production are low. Since in the long run all factors of production are varied, there are no fixed or variable costs. Therefore the benefits of economies of scale can only be experienced in the long run. The long run cost curve represents the economies of scale. When the curve slopes downwards, there are decreasingreturns to scale, when the LRAC is 1 there are constant returns to scale and when the LRAC has a positive gradient there are increasing returns to scale. Returns to scale means the rate at which the marginal cost increases relativeto the unit output produced. The LRAC is drawn based on the areas of tangency between the SRAC and the LRAC. There are internal and external economies of scale which are derived from the long term growth of the firm itself. For example learning by doing, specialization, monopsony power and networks created. Also the firm derives managerial economies of scale through increased investment in human capital. Also there are external economies of scale that include better research and development as well as a logistics network. These are benefits that occur outside a firm but within the industry.

ECONOMICS3Diseconomies of ScaleDiseconomies of scale occur when the marginal costs of producing output are higher thanthe actual profits that are obtained from the increase in production scale. When the LRAC slopes upwards, the diseconomies of scale begin increasing. Some examples of the diseconomies of scale compose of administrative issues, medical care as well as insurance for the employees that were engaged in order to increase the scale of production.ZTL limited is a car garage and repair company that has been in business for the last 5 years. Initially the company had three main workers but as time grew it had to hire more employees. The company was able to satisfy more clients and grow its revenues. It however was important for the company to hire more management employees in order to deal with the HR issues of the employees.Question 2 Income elasticity of demand refers to how sensible the quantity demanded of a specific good is to any change in real income of consumers who purchase the good, with the other factorsremaining constant. The formula for calculating income elasticity of demand is simple. It is found by dividing the percentage change in the quantity demanded by the percentage change in income (Khan 2012). Income elasticity of demand is often used to establish if a specific good represents a luxury or a necessity depending on its values or type. A positive income elasticity ofdemand represent normal, or necessity goods as the value is between zero and one and consumers will purchase them regardless of the change in their real income, for example, electricity and water. A negative income elasticity of demand, on the other hand, represents inferior goods and their demand decreases as the consumer real income increases for example margarine, a cheaper substitute for butter. The income elasticity of demand linked to luxury

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