Question

What are economies of scale? Where do the economies of scale for Maruti come from?

Answer 1

The economies of scale means the cost advantages that a business obtain when they increase their production then the costs per unit declines the more they produce. It may occur for several different reasons such as buying in bulk, labor division, and spreading overheads.

Maruti is the biggest carmaker in the country with nearly 50 per cent share in market. It also earns higher profit on each car than its rivals because of the economies of scale. The edge that it enjoys over its competitors primarily derives from its gigantic scale. The sheer volume provides the company enhanced economies of scale and also gives the capacity on negotiating a bargaining with the component supplies. Moreover the company has strong research and development, and marketing network that creates entry barrier for new firms. Furthermore it has a huge cash and cash equivalent reserve for nearly Rs 300 billion that provides an additional income