6 assignments ( wk)

Economies of Scale for Tap Water – High fixed costs of a national network To produce tap water, water companies had to invest in a huge network of water pipes stretching throughout the country. The fixed cost of this investment is very high. However, since they distribute water to over 25 million households, it brings the average cost down. However, would it be worth another water company building another network of water pipes to compete with the existing company? No, because if they only got a small share of the market, the average cost would be very high and they would go out of business. This is an example of a natural monopoly – where the most efficient number of firms is one (Pettinger, T., Anjoorin, L., Sen, D., & Adusei, A. K., 2019). A natural monopoly occurs when the most efficient number of firms in the industry is one. A natural monopoly will typically have very high fixed costs meaning that it is impractical to have more than one firm producing the good. It makes sense to have just one company providing a network of water pipes and sewers because there are very high capital costs involved in setting up a national network of pipes and sewage systems. To have two different companies offering water wouldn’t make sense as the average cost would be very high compared to just one firm and one network. There would also be the inconvenience of having two firms dig up the road to lay a duplicate set of water pipes (Pettinger, T., n.d.). The relationship between the macro environment and individual firms/industries through microeconomic factors of demand, production, cost, and profitability are nonexistent considering there is a natural monopoly for the tap water industry. Water is essential to every aspect of household and community life and the economy. Therefore, firms trying to enter the market would see diseconomies of scale because of the increased cost associated with setting up the infrastructure necessary to provide water to the number of households to be effectively competitive. This is why many firms do not dare compete because the cost to enter the market for tap water is so high that economies of scale would not be reached at the level needed to make a new tap water company profitable. ============================== second All of the discussion themes (Application of Microeconomic Principles, Demand Elasticity, Economies of Scale, Price Discrimination and P.E. of Demand, Aggregate Expenditure Model, Federal Reserve Tools, Saying vs. Doing, The Euro, Other Influence, and Compare & Contrast Strategies) provided in this course are significant and pragmatic to both microeconomics and macroeconomics. But among them all, I would prefer to discuss Economies of Scale (Discussion 2.3). As we may all know, Economies of Scales is defined as the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing which causes scale to increase. From the macroeconomic standpoint, this theme was actually eminent during the peak of the COVID-19 pandemic where the economy of every country in the world was practically devastated. We saw governments' revenues around the world dropped because economic activities were either slow or shut down to prevent the spread of the virus and to keep people safe. On the other hand, from a microeconomic standpoint, we saw businesses that were in the travel industry, entertainment industry, fast food & restaurants, Parks, Beauty salons & barber shops, and many more could not operate normally because they had to adhere to health protocol put into place by the Center for Disease Control (CDC) and other related agencies of government. And so as a result of the lockdown, these national businesses could really function as they were supposed to thereby denying both state and federal governments the regular amount of taxes collected. This situation caused a lot of states a recession that led them to call on the federal government to bill them out. Most businesses were also affected financially that they went bankrupt or were on the verge of going bankrupt that led the federal government to bill them out of bankruptcy, especially the airline industry and small businesses. But there were other businesses that did extremely well financially during this pandemic. Among them was mostly the e-commerce industry. Companies like Walmart, Amazon, and others sold at a record profit margin because since there were lockdowns and walk-ins were prohibited at a larger scale, consumers could only order their supplies online to be delivered to them at home. And because almost everyone in the United States had to do online shopping, basic goods were short, and inventories ran low because production levels also went low if not stopped. This situation also affects the cost of production, goods sold and purchased. For example, because Walmart and Amazon depend on vendors to supply them with the goods that they sell and vendors fell short of that, it affected their supply chain. The cost of goods sold went high because they had to do multiple deliveries around the U.S. Those deliveries cost more to get the goods to the customers on time. Customers were also charged more than the normal shipping fees to receive their goods on time.