economies of scale
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What are economies of scale? Give an example. What are the graphic relationships among fixed, variable, total, average, and marginal costs? What is the relationship between productivity, cost of inputs, and the cost of production?
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1) Select a good or service produced by a organization you are familiar with. Is the price elasticity of demand for this product price elastic or price inelastic? Based on this determination what would be the impact of raising the price of the product? What would be the impact of lowering the price of the product?
2) Using the same good or service selected in question 1, determine substitutes and compliments, and answer the following questions:
a) What has happened to the price of the substitutes and complimentary goods/ services for your selected product over the last year?
b) How have price adjustments impacted the demand for the selected product?
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Economies of scale occur when an industry can be arranged such that each additional unit of production costs less than the last. In this way, larger companies can be much more profitable than smaller ones. The smaller ones find themselves unable to compete- in order the match the prices of the large companies, they cannot cover their costs. They go under and the market becomes dominated by one or a few large firms.
Economies of scale is related to marginal costs. The marginal cost of a unit is the additional amount that it adds to the total costs incurred by the firm. If it costs $5 more to make the 12th unit, but only $4 more to make the next one, the marginal cost is declining. If a firm can reach a level of production where marginal costs decline, it achieves economies of scale.
Total costs are the sum of variable and fixed costs. Variable costs are those costs that are affected by the level of production. They include such things as raw material and labor. Fixed costs are those that stay the same regardless of the level of production. They ...
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