Question

3-2 Please provide details and examples

How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve?

Describe economies of scale and diseconomies of scale.

What are the determinants of economies of scale and diseconomies of scale, respectively?

Using a real-world company (other than Sysco), explain the causes of economies of scale for your company.

How would economies of scale help your company compete in its industry?

Answer 1

1. The long run average total cost LRATC is composed of the lowest portions of each successive SRATC.

The resulting curve is also referred to as the "envelope" curve.

2.Economy of scale occurs if the percentage increase in the output exceeds a certain percentage increase in all

of the inputs. For example if the inputs K and L are increased by 100% ( doubled) and if output Q increases by

200%, is a case of economy of scale. On the other hand if the increase in output is less than 100%, we would

witness diseconomies of scale.

3.Economy of scale is brought about by the use of resources possessing high productivity or by the use of processes

or technology only possible with large volumes of output. As the firm enlarges its size and volume of operations, there

arise many efficiencies associated with large-scale production. Managing large enterprises also produces certain

managerial inefficiencies bringing about diseconomies of scale.

4.DHL serves as a good example where economies of scale are evident. It uses big planes, many distribution centers

and hundreds of collection points and many, many partners to help it move the merchandise quickly all over the world.

5.Economy of scale allows the costs of a company to be kept low. Because of low costs, a company can compete much

more effectively with other companies are not favored by this phenomenon.