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Economies of Scale | Economics Assignment

   

Added on  2020-04-07

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ECONOMICS 1ECONOMICSBy (Name)Name of the class (course)The Course instructor (Professor)The InstitutionThe City and State locationThe Date

ECONOMICS 2Part A: MicroeconomicsQuestion 1Economies of scaleEconomies of scale denote a cost advantage that results from an increase in output of a product. When production grows, it leads to lower average costs in the long run and hence economies of scale. This advantage takes place due to the inverse correlation between the average costs and the quantity produced. The higher the amount of a product generated, the lower the average costs since the costs are spread over a big number of goods[ CITATION Man14 \p29 \l 1033 ]. The economies of scale are necessary because they enable a company to become more efficient as it increases in size. For instance, in this airline industry, Qantas is dominant, and it is said to be well cashed up, a scenario that demonstrates that this company is benefiting from the economies of scale. Moreover, the focus on Virgin Blues leisure travel makes it boost its productivity and thus economies of scale.Market types Economies of scale are most important in a monopoly and oligopoly market structures. The existence of a monopoly company and oligopolistic firms depends on their ability to maintain barriers to market entry. The economies of scales make a monopoly business to lower the average cost of every unit of output and thus such company is in a position to reduce the prices to bar other companies from entering the market. Likewise, an oligopoly generates goods that exhibit significant economies of scale where the cost of making each unit decreases with large quantities. Such economies deter other companies from entering the market because of

ECONOMICS 3little market share that can be gained and that the returns would not be sufficient to be profitable[CITATION Fra15 \p 41 \l 1033 ]. Question 2In 2002-2003, the Australian airline industry fell under oligopoly market structure. Oligopoly entails a market structure where a few companies dominate the market, selling either differentiated or homogenous product and with significant hurdles to market entry. Interdependence is also another vital feature of oligopoly market structure[ CITATION Irv16 \p 34 \l 1033 ]. The companies are interdependent in decision-making because any alteration in the product or price by a firm will have a direct consequence on the other businesses. The 2002-03 Australian airline industry exhibit characteristics of an oligopoly market structure. Foremost, there are a few firms in this sector, that is, Qantas and Virgin Blue. Since there are only two companies in this industry, this oligopoly can be categorized as a duopoly market structure. Although there exist only two companies, this industry is dominated by Qantas meaning that Qantas has a larger market share than Virgin Blue. Measures by each company to defend its market share show how decisions of one firm affect the other company. For example, Qantas is focusing mainly on leisure travel on the main trunk routes. On the other hand, Virgin Blue is protecting its market share through service innovations and upgrades. Furthermore, the existence of only two companies in this airline industry shows that Qantas and Virgin Blue have erected significant barriers to new market entrants.

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