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In: Economics

Define economies and diseconomies of scale and provide one example of each either in the education...

Define economies and diseconomies of scale and provide one example of each either in the education industry/auto industry

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Expert Solution

Scale economies are when the price per unit of manufacturing (average cost) declines due to an increase in output (sales).

Scale disadvantages are when the price per unit of manufacturing (average cost) rises due to an increase in output (sales).

Growth gives a company both benefits and disadvantages. These communicate and decide the optimum or most effective size for the company depending on the nature of the company and how it is managed.

This is the area of economies and diseconomies of scale.

The most common reason for Economies of scale is that some production costs are fixed (as production increseases these costs stay constant). Therefore since costs per unit (Average Costs) are calculated by dividing the cost by the number of units of output

Reasons for diseconomies of scale

1. Communication - becomes more complex

2. Coordination - between departments

3. X- Inefficiency - management costs increase (non-productive costs)

4. Principle agent problem - delegating to employees who are not as committed as the owner

Toyota is on the verge of becoming the "10 m club's first member." GM and Volkswagen will follow it quickly. There are many reasons why size is important. In addition to the apparent economies of scale and the powerful bargaining power with vendors, being large makes it easy to offer a wide variety of products that can exploit every niche, particularly with today's flexible production lines. And the largest vehicle manufacturing organizations are better prepared to distribute the heavy price of meeting ever tougher environmental regulations. It is essential to have high productivity.

Manufacturers of luxurious designs with powerful brands, such as BMW and Jaguar Land Rover, can do well to sell comparatively tiny hand car quantities

The importance of large scale innovation, investment and R+D (often said to be an important barrier to entry), VW is investing a whopping €84 billion ($114 billion) over the next five years, with two-thirds going to develop new vehicles and technology


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