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ECONOMIES OF SCALE

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What are some facors that give rise to economies of scale? and Diseconomies?

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Economies of scale can be termed as the increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. Economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical reach.

There are two types of economies of scale:
External economies - the cost per unit depends on the size of the industry, not the firm.
Internal economies - the cost per unit depends on size of the ...

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What are some factors that give rise to economies of scale? and Diseconomies?

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Among the roadside stores of a middle class suburb, there used to be two drugstores, approximately the same size. One was on the side of the main road where traffic was the busiest in the morning; the other was on the opposite side of the road. They were about 50 meters apart. After many years of competing, the two businesses were merged and the shop on the busy-morning side of the road was shut down. Why did the owners of these businesses decide to do this? Could this decision be explained by the concept of economies of scale?'

Among the roadside stores of a middle class suburb, there used to be two drugstores, approximately the same size. One was on the side of the main road where traffic was the busiest in the morning; the other was on the opposite side of the road. They were about 50 meters apart. After many years of competing, the two businesses were merged and the shop on the busy-morning side of the road was shut down. Why did the owners of these businesses decide to do this? Could this decision be explained by the concept of economies of scale?'

(a) A list of reasons (based on micro economic theory) why the owners decided to merge the businesses (or close one and retain the other). The reasons should centre around costs structures such as average, fixed, variable and total costs and other relevant factors

(b) Arguments for and against whether the merge decision could be explained by the concept of economies of scale.

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