2. What is the meaning of economics of scope? How do they differ from economics of scale?
Provide examples in your discussion.
Economies of scale refer to situations “in which the output grows proportionately faster
than inputs” (Salvatore, 2015, p. 335). Economies of scale can occur due to technology and
financial changes. As firms become larger, doubling the input can lead to an output that is more
than double the amount of input. This effect can lead to discounts if firms purchase in bulk and
allows tasks to be specialized resulting in greater efficiency. However, if a firm expands too
much, it becomes difficult for the company to manage its costs and eventually, there is a
decreasing return to scale. Economies of scope is a way firms can reduce costs by manufacturing
two or more products together rather than producing each item separately. For example, a
butcher can sell meat from animals, but is left with bones and other waste. The butcher decides
to
sell the bones and other items such as pig ears to the public as dog chew toys. The butcher has
now found a way of profiting off the waste and receives an additional income, ultimately,
reducing the cost of the overall operation.
5. As an employer wants to reduce the production cost during the economic recession,
he/she could choose to (1) lay off some workers without changing wages or (2) keep all
workers but cut wages for all. Which method would you choose? Why?
In the event of an economic recession, I would choose to keep all workers and cut wages.
It is difficult to know how long a recession will last. It is imperative to complete an analysis of
the business and what cost savings need to be done to survive financially before making any
changes to the company. Why? If the employer decides to lay off a number of staff members, the
remaining employees may begin to doubt their job security. Also, the company may incur extra
expenditures due to laws and regulations such as the Federal Worker Readjustment and
Notification Act (“Cutting Costs”, 2004). Further, if a company miscalculates the length of the
recession, they may be faced with the need to hire employees, typically at a much higher cost
due to training needs, etc. Wage cuts will allow employees to keep their job and the company
will retain its talent and knowledgeable staff. Unfortunately, wage cuts often lead to a low morale
amongst employees (Kube, Maréchal, & Puppe, 2013). However, a method that might be utilized
to invoke goodwill between employees and employer, is to let the employees know the situation
and ask for staff input on ways to reduce costs within the organization. As a result of this
approach, employees often come up with innovative ideas to minimize expenses in an effort to
preserve their positions and prevent layoffs. This results in higher morale and greater loyalty for
employers due to the company’s show of faith in its employees (“Cutting costs”, 2004).
References
Employment Practices Solutions. (2004, February 1). Cutting Costs: Should personnel be the
first to go? Retrieved from http://www.epspros.com/news-resources/whitepapers/2013-
prior/should-professionals-be-first-to-go.html
Kube, S., Maréchal, M. A., & Puppe, C. (2013). Do wage cuts damage work morale? Evidence
from a natural field experiment. Journal of the European Economic Association, 11(4),
853-870. doi:10.1111/jeea.12022
Salvatore, D. (2015). Managerial economics in a global economy. (8th ed.). New York, NY:
Oxford University Press.
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