Microeconomic Analysis: Analyzing Tesla's Economies of Scale Strategy

This report provides a microeconomic analysis of Tesla's strategy, focusing on how the company utilizes economies of scale to optimize production and reduce costs. The report begins with an introduction to the concept of economies of scale, explaining how increased output can lead to lower lon...Read More

Running head: Microeconomic Analysis
MICROECONOMIC ANALYSIS
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Microeconomic Analysis
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Concept of economies of scale........................................................................................................2
Contribution of economies of scale in profit maximization............................................................3
Contribution of economies of scale in TESLA................................................................................4
Conclusion.......................................................................................................................................7
Reference list...................................................................................................................................9

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Microeconomic Analysis
Introduction
In the modern business, using the economics of scale is one of the important aspects and
most of the firms are depending on the economies of scale in order to expand them in the
international market. This is because the economies of scale provides the benefits of cost
minimization in long run as increasing the production of products will shift the LRAC to fall.
However, the study is significant in the sense that it will highlight the strategies taken by TESLA
in order to increase the production of vehicles by taking the advantage from economies of scale.
The main aim of this study is to highlight the contribution of economies of scale in increasing the
sales through online business.
Discussion
Concept of economies of scale
Economies of scale are cost advantage situations that are experienced by the firms when
it increases the level of output. Due to the presence of inverse relationship among per unit fixed
costs and quantity of output, the economies of scale exists. Greater the quantity of output
produced less is the price of per unit fixed costs. However, the economies of scale are also
significant in reducing the variables costs of the products that are being produced.

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Figure 1: Characteristics of economies of scale
(Source: Created by Author)
Contribution of economies of scale in profit maximization
From the above figure, the contribution of economies of scale can be highlighted as six
main categories likely cheaper capital, spread of risk, reduction in the production costs, efficient
level of production, buying in bulk, reduction in the labor costs. Through the incorporation of
above-mentioned factors, the companies can increase the quantity of goods in the end. However,
in the long run, the development of better technological up gradation, the companies will be able
to minimize the long run variable costs and per unit fixed costs. However, the reduction in the
logistics costs will allow the companies in storing their inventories that will increase the future
demands from the economy. The capital becomes cheap, it induces the development of
resources, and firms can invest better technologies so that the production within the economy
will definitely increase in the end.

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Contribution of economies of scale in TESLA
Achieving the economies of scale is going to mainly increase the level of the profit and
most of the companies in the global industry are looking to achieve the economies of scale.
Through the economies of scale, most of the big companies will have advantage as small firms
will be having high average cost and with the increase in the quantity of output will
automatically reduce the average costs (Baqaee, 2018). This will definitely help the company in
increasing the rate of production; they will be willing to indulge the development of the overall
level of the economy the production will increase. Through the incorporation of better
development of the economy and the rate of production, level will increase. This will definitely
increase the development of the resource.
Figure 1: Economies of scale diagram
(Source: Created by Author)
The above diagram is showing the fact that when the product quantity is increasing the
average price of the product is going to fall. Based on the above-mentioned theory, the TESLA is

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going to increase the production rate of their cars so that in the end, the average cost of
production decreases (Baumers et al. 2016). On the other hand, through the introduction of better
improvement in the manufacturing unit is going to increase the development of resources.
Figure 2: Cost curve and economies of scale
(Source: Created by Author)
The point of intersection between the LRAC and LRMC is going to increase the
development of the resources that will automatically identify the given quantity of goods and
services that can be produced at a particular cost. Through the improvement in the economic
development, most of the companies will be willing to pay high quantities of good at low cost
and they will prefer the falling side of LRAC. Most of companies like Volkswagen, Toyota have
taken this much of strategy that has been highly indulged in using technology like better
improvement in the technology, better improvement in the design of the products and even better
design of the vehicles are key point to increase the production rate of the vehicles (Holtz-Eakin

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and Lovely, 2017). The decision of cutting the price of Model 3 sedan is mainly because it will
be increasing the factor to increase the customer satisfaction and the customer attraction is very
much important. The Tesla Company decreases the price of the vehicles as the production costs
decreases with the increase in the economies of scale position. On the other hand, taking the help
of economies of scale, the company is buying the raw materials in bulk has improved the
quantity of the vehicles they are producing. The decrease in the cost of production has allowed
the TESLA Company to expand their business through the online portal so that they can reach
good number of customers. TR= P*Q. The price P is falling due to the fall in the LRAC curve
due to reduction in variable costs due to economies of scale and on the other hand, quantity
demanded Q is increasing due to increase in efficiency of products that in turn is increasing the
TR function.
Through the development of the overall economy the company will be highlighting the
fact that through the fact that increasing the economies of scale is going to improve the
development of resources. Moreover, the development of better technology will bring in
information in the form of better development of the economy. At the start of 2019, the federal
tax credit for Tesla buyers fell to $3,750 from $7,500 as the company will be able to sell their
maximum number of vehicles. One of the major importance of economies of scale is going to
highlight the fact that company like TESLA will be hoping to increase the resource distribution
and through the economies of scale, the company will be helping them self in order to increase
the number of customers in the economy.
The economy of scale is going to increase the information spread and the company will
get the raw materials at a cheap cost. Another impact of the economies of scale is that
collaboration among the raw material supplier is possible that enables the information spread in

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an effective way. It is highly important in the sense that through the improvisation of the benefit
of technology TESLA can stick to the strategy. They are aiming to sell their cars through online
portals trusting on the local supply chain management and this initiative will be the biggest
opportunity for the company to trust their customers. It has been seen that about 60% of the
TESLA car purchaser prefer to test drive and on the other hand, 89% of the consumer of other
car companies prefer test drive before purchasing vehicles.
This is one of the important fact in the sense that customers of Tesla having more brand
loyalty. It is highly important for the company to increase the process of distribution of cars
through the online portal. The online portal is going to induce the development of the online
business. It is important to increase the communication among the shareholder and customers. It
is highly important for the company to induce the development in the economy. Through the
improvement in the communication among them will increase the online platform so that the
economy can increase the resource distribution of the company. Through the development of
company, it will be helpful for the economy to increase the resource utilization and they will be
willing to invest more if they can increase the customer level.
Conclusion
The study has came to the conclusion that in order to indulge the development for the
business, economies of scale is an essential thing that most of company will be aiming to
increase and implement them in their business. Even TESLA is improving their business through
the incorporation of the online business platform. This is important in the sense that through the
use of resources, the company will be able to trust their customers and it has been seen they are

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having high brand loyalty as 68% of the customers prefer test driving and rest can purchase the
cars without test drive.

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Reference list
Baqaee, D.R., 2018. Cascading failures in production networks. Econometrica, 86(5), pp.1819-
1838.
Baumers, M., Dickens, P., Tuck, C. and Hague, R., 2016. The cost of additive manufacturing:
machine productivity, economies of scale and technology-push. Technological forecasting and
social change, 102, pp.193-201.
de Jong, S., Hoefnagels, R., Wetterlund, E., Pettersson, K., Faaij, A. and Junginger, M., 2017.
Cost optimization of biofuel production–The impact of scale, integration, transport and supply
chain configurations. Applied energy, 195, pp.1055-1070.
Despeisse, M., Baumers, M., Brown, P., Charnley, F., Ford, S.J., Garmulewicz, A., Knowles, S.,
Minshall, T.H.W., Mortara, L., Reed-Tsochas, F.P. and Rowley, J., 2017. Unlocking value for a
circular economy through 3D printing: A research agenda. Technological Forecasting and Social
Change, 115, pp.75-84.
Holtz-Eakin, D. and Lovely, M.E., 2017. Scale economies, returns to variety, and the
productivity of public infrastructure. In international economic integration and domestic
performance (pp. 73-91).
Nykvist, B. and Nilsson, M., 2015. Rapidly falling costs of battery packs for electric
vehicles. Nature climate change, 5(4), p.329.
Soccol, C.R., Neto, C.J.D., Soccol, V.T., Sydney, E.B., da Costa, E.S.F., Medeiros, A.B.P. and
de Souza Vandenberghe, L.P., 2017. Pilot scale biodiesel production from microbial oil of
Rhodosporidium toruloides DEBB 5533 using sugarcane juice: Performance in diesel engine and
preliminary economic study. Bioresource technology, 223, pp.259-268.

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Vernon, R., 2017. International investment and international trade in the product cycle.
In International Business (pp. 99-116). Routledge.

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