Understanding Economies of Scale

This assignment delves into the economic concept of economies of scale, examining how increasing production size can lead to lower average costs. It analyzes various factors influencing this relationship, including transaction costs and labor efficiency. The assignment also explores the broader implications of economies of scale for business competitiveness, national development, and labor markets, referencing relevant literature and real-world examples like Qantas' annual report and Jamaica's early childhood stimulation intervention.

Economics Assignment 1
Part A: Micro-Economics:
1- Economies of Scale: When a company or a business achieves more efficiency and output
with decreased input, its marginal costs in terms of production decreases, thus business is
said to have achieved the economies of scale (Tegtmeier 2013). For Example, discount
on bulk purchases, information sharing related economies, department or labor
specialization etc.
Market Types and Importance of Economies of Scale:
Perfect Market: In such a market there are almost infinite number of buyers and sellers
and so no one seller can influence market in their way.
Economies of Scale have usually no importance in such markets as each supplier assumes
constant returns on economies, and so the unit costs remain the same. One basic reason of
this is the price is set my market and no single supplier can set price on his own (David
Myers 2015).
Monopoly: Such a market has one big supplier of particular goods or services. He may be
doing differentiation and controls the whole market.
In a monopolistic market, the economies of scale is important, as it keeps increasing and
total average cost keeps falling. This is due to considerable amounts of fixed costs, big
discounts on purchases and large scale production.
Oligopoly: In an oligopoly instead of one supplier, a number of limited producers of
goods or services collude with one another and derive the market. They may be two or
more in number (Polkinghorn 2016). Oligopoly Firms are also able to take advantage of
economies of scale by decreasing their average costs.

Economics Assignment 2
Monopolistic Competition: Such a market combines the features of a monopoly and
perfect competition. Every provider of goods or services in large enough to influence its
market but is differentiated from the other one.
Economies of scale are achieved by every player due to large production capacities, so
mostly the competition is based on quality, customer retention and differentiation
(Dunne, Klimek, Roberts and Xu 2013).
2- With the commencement of 21st century the Australian industry had two key player
Qantas and Ansett along with two new entrants Virgin Blue, and Impulse airlines. With
the acquisition of Impulse airline by Qantas and collapse of Ansett Group, only two
airlines were left to compete in Australian Industry. So it showed a “Monopoly” of one
big Airline Qantas in 2002-03. Although Virgin Blue was expanding, but still large
market share (almost 80%) was possessed by Qantas airlines in domestic industry and
Virgin Blue had to do more to transform the market into “Perfect Competition” or an
“Oligopoly”.
In International market of Australia the only “Flag Carrier” remained was the “Qantas
Airlines” in 2003, but the international Market share was very low and it had to face
“Perfect Competition”. This was because Qantas airlines were facing many
unmanageable circumstances at that time. In their annual accounts of 2003 Qantas
themselves stated reduced planned international flights by 20%. Additionally they had to
bear low levels of working capitals and redundancies:
“These initiatives resulted in a one off charge of $91 million for the write-down of
Boeing 767-200 fleet, which will be retired by the end of 2003-04 financial Year.”
Qantas Audited Accounts 2003

Economics Assignment 3
But unlike in 2003 now Qantas has a big international market share around 28% but is
losing its domestic share.
Part B: Macro-Economics:
1. If we take a look at macroeconomic data, France’s economy is currently undergoing
“Expansion” and soon may hit “Cyclic Peak” followed by a “Recession” in some years.
Because the GDP has almost reached its maximum level it can be predicted as a “bust” in
the economy. Although France has a steady trend in terms of GDP and unemployment
the GDP of the country may start declining at this stage, the employment rate of the
country is decreasing but with a slower rate as a result the economy can contract. The
small decrease in unemployment rate may not be stable as Macron has implemented the
same policies as former leaders. This all can result in a tight labor market and future
uncertainty about the inflation. Decreased Tax cuts and more government spending is
needed to meet the aggregate demand in the economy and making the buyer purchasing
power stronger. “Most of the unemployed, lack qualifications that fit the labor market’s
needs. France’s unemployment rate, at around 10%, suggests that this skill gap runs
deep.” Article by Bloomberg: The French is bad in a crisis
2. French Economy in 2017 using AD/AS model.
The AS describes the total amount of commodities in French economy available at all
feasible levels of prices whereas AD denotes the amount of commodities in French
economy that will be purchased at all feasible level of prices. In the economy, as the
prices of most commodities alter, the level of price alters and individual and businesses
alter how much they purchase (Baldwin and Scott 2013). The AS curve on graph displays

Economics Assignment 4
the relationship between prices and output supplied while AD demand curvature denotes
relationship between price and the real GDP demanded. Since French economy is
expanding in 2007, it will mean that both AS and AD will be positively shifting as shown
in AD-AS Model below:
Bringing together AD and AS curves shows AD/AS equilibrium in economy. The
intersection of AS1 and AD1 curves indicate an equilibrium prices level P1 and
equilibrium real GDP Q1 before the shifts. When both curves are shifted outwards since
French economy is expanding in 2007, the intersection between AS2 and AD2 indicate
an equilibrium price level P2 and equilibrium real GDP Q2 after the shifts.
3. French has potential as the labor in France is productive. To Stabilize or boost the
growth, France government can:
AD2
AD1
AS2
AS1
Price Level
Real GDP
Q2Q1
P1
P2

Economics Assignment 5
1- Increase the working hours of employees and raise their participation to make their
skills better as well as segmentation of job division according to the specifications
and requirements.
2- Emanuel Macron must translate and provide details about his policies, especially on
deregulations and social protections.
3- Reduce the taxes so as to lower cost of production
4. Macron, Investment in educating workers and infrastructure. What Macron needs to do is
to make the fluctuations of economy more close to trend lines so that recession are not
severe and expansion can reach at full peak (Lange, Ross and Vannicelli 2016). The
investment in education and training of the workers of the country is a major variables in
the determination of how well the economy will perform. Increasing education levels
culminates to well-trained workers which tend to make workers more productive and are
able to earn more money than workers with poorer training (Buckley and Casson 2016).
New investment in education will yield workers capable of functioning in novel
industries (Fägerlind and Saha 2016). French economy shall become more productive
since the proportion of the educated workers increase because the educated workers can
more efficiently undertake their task that call for literacy and critical thinking
(Ștefănescu-Mihăilă 2015). The French economy will thus see faster economic growth.
This is because education is investment in human capital, identical to investment in better
equipment. It will lead to a knowledge-based economy and the firms will be able to
increasingly produce theoretically (Ehrenberg and Smith 2016). This is because the

Economics Assignment 6
knowledge and skills of employees in labor supply remains a critical factor in the
determination of both business as well as economic growth (Blaug 2014).
French economy will subsequently have substantial supply of skilled labor arising from
school education and training and hence able to capitalize on such an opportunity via the
development of more-value industries like high-tech manufacturing (Carlton and Perloff
2015). The Cobweb Model can be used to show that since training and education takes
duration to complete, shifts in the demand for a given kind of workers have distinct effects in
the long- and short run (Baum 2015). The model analyzes the supply over the long-run, but
demand shifts and wage shifts are perceived in short-run as they move towards the long-run
equilibrium (Foster and Rosenzweig 2017). The short run shifts in demand and wage rate is
shown below:
In the short run, the rise in demand for better-trained employer leads to increase in wages
beyond equilibrium level (A). Rather than increase being along long-run labor supply
curvature, it takes place along more inelastic short-run labor supply curvature (L). The
short-run curvature remains more inelastic since there is a restrained number of
employees that have or can immediately train for novel skills (Gertler et al. 2014). As
more workers get trained (B), the labor supply will shift rightwards with the new workers
affecting wage rate as shown:

Economics Assignment 7
With the risinng new workers availability, there is dowward pressure on wage rate, that
declines from W2 to W3 hence new wage equilibium is established:
Due to the declining wage rate, fewer workers become interseted in training for skills that
employers demand. This subsequently push wage rate upwards to W3, though the wage
increase comes in smaller and smaller increments (Barro 2013). The wage cycle increases
and labor rises continues till it has hit equiibrium; the initial upward shift in demand
intersects the long-run labor supply.

Economics Assignment 8
References
Baldwin, W. and Scott, J., 2013. Market structure and technological change (Vol. 18). Taylor &
Francis.
Barro, R.J., 2013. Education and economic growth. Annals of Economics and Finance, 14(2),
pp.301-328.
Baum, W.C., 2015. French Economy and the State. Princeton University Press.
Blaug, M., 2014. Economics of education: A selected annotated bibliography. Elsevier.
Bloomberg Article: The French Economy is bad in a crisis, Written by: Phillippe Waechter,
Publish Date: May 16, 2017
Buckley, P.J. and Casson, M., 2016. The future of the multinational enterprise. Springer.
Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.
Ciliberto, F., Murry, C. and Tamer, E.T., 2016. Market structure and competition in airline
markets.
David Myers CEcD, M.A., 2015. economies of scale. Economic Development Journal, 14(3),
p.11.
Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of
market structure. The RAND Journal of Economics, 44(3), pp.462-487.
Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy.
Routledge.
Fägerlind, I. and Saha, L.J., 2016. Education and national development: A comparative
perspective. Elsevier.
Foster, A.D. and Rosenzweig, M., 2017. This paper seeks to explain the U-shaped relationship
between farm productivity and farm scale-the initial fall in productivity as farm size increases

Economics Assignment 9
from its lowest levels and the continuous upward trajectory as scale increases after a threshold-
observed across the world and in low-income countries. We show that the existence of fixed
transaction costs can explain why the smallest farms are most efficient in their use of labor,
slightly larger farms least efficient and larger farms as efficient as the ... (No. 1059).
Gertler, P., Heckman, J., Pinto, R., Zanolini, A., Vermeersch, C., Walker, S., Chang, S.M. and
Grantham-McGregor, S., 2014. Labor market returns to an early childhood stimulation
intervention in Jamaica. Science, 344(6187), pp.998-1001.
Lange, P., Ross, G. and Vannicelli, M., 2016. Unions, change and crisis: French and Italian
union strategy and the political economy, 1945-1980. Routledge.
Polkinghorn, A., 2016. Economies of scale. Br J Gen Pract, 66(648), pp.351-351.
Qantas Annual Report 2003,
http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/
annual-reports/2003AnnualReport.pdf, Page:4
Ștefănescu-Mihăilă, R.O., 2015. Social Investment, Economic Growth and Labor Market
Performance: Case Study—Romania. Sustainability, 7(3), pp.2961-2979.
Tegtmeier, L.A., 2013. Economies of Scale. Aviation Week and Space Technology, 175(4).