I need Help with my DB-5 assignment

Economies of scale

Student name: Desmond K Sangbong

Professor: Gerald Weisenseel

Course title: Applied Managerial Economic

Date: May 26, 2015

Without efficiency in the organization, the entity can continue to losing lots money since it incurs extra cost, which is usually controllable using few management techniques. Seeking economies of scale is one of management techniques that enhance the efficiency of company and reduce it costs and increase the potential income. Efficiency is all about acquisition and utilization of resources in the right manner in order to reduce costs associated with resource such as wastage and at the same time enhance the revenue of the company. This is possible by developing and implementing plans such as economies of scale, which ensures realization of efficiency within the organization. Therefore, organization efficiency is the ability of an entity implementing set plans using smallest possible overheads or resources.

As far as microeconomics is concerned, economies of scale is all about cost advantages that an entity realizes due to scale of operation and size as well as output with the cost incurred per unit of output decreasing with rising scale since the fixed cost spreads out with more units of output. In most cases, operational efficiency is the fundamental factor that increases with increases scale and ultimately causing a reduction in variable cost (Moore, 2011). In simple terms, the organization achieves the economies of scale upon producing goods or services in large scale with less input costs. The company thus increases units of product besides growing hence and it becomes in a better position to reduce costs. This is because growth goes hand in hand with economies of scale.

Two ways exists in which the organization use in realizing the economies of scale. Classical economists such as Adam Smith (1776) believe that the organization can realize the economies of scale by first ensuring there is division of labour and second is through specialization (Moore, 2011). These two techniques ensure that employees are able to concentrate on their specific task and with progress of time, they improve the skills required to perform the job, courtesy of learning curve. They thus perform tasks with less and less time and in a quicker manner with progress of time due to growth of competencies in their various areas of specialization. Therefore, with efficiency the organization can save both time and money with the level if production increased.

Besides division of labor and specialization, the organization can achieve economies of scale by buying inputs at lower costs due to bulk purchases. The seller can provide quantity or volume discount to the organization (buyer) upon buying large quantities of goods Canback, Samouel, & Price, 2006). The company thus enjoys the economies of scale resulting from reduced price per unit due to bulk purchases.

Costly inputs such as research and development as well as advertising besides managerial expertise are expensive but in the long-term leads to increase in efficiency (Moore, 2011). Such undertakings combined with skilled labour can cause a reduction in the cost of production and selling which in turn enables the organization realize economies of scale.

In the same that economies of scale exist, diseconomies of scale exist as well. Diseconomies of scale exists in circumstances that the production becomes less than the proportion of inputs. This implies that there is some degree of inefficiency within the organization or the entire industry leading to a rise in average costs (Canback et al, 2006). Continuous losses can be a good indication of economies of scale.

References

Canback, S., Samouel, P., & Price, D. (2006). Do diseconomies of scale impact firm size and performance? A theoretical and empirical overview. ICFAI Journal of Managerial Economics, 4(1), 27-70.

Moore, R. (2011). Economies of scale. Containerisation International, 44.