Long-Run Average Cost and Economies of Scale Discussion Questions

Prior to beginning work on this discussion forum, read David Trainer’s Sysco Feasts on Economies of Scale for Strong Competitive Advantage, as well as Chapter 8 of the textbook.

Based on this information, respond to the following:

How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve?

  1. Describe economies of scale and diseconomies of scale.
  2. What are the determinants of economies of scale and diseconomies of scale, respectively?
  3. Using a real-world company (other than Sysco), explain the causes of economies of scale for your company.
  4. Explain how economies of scale help your company compete in its industry.

Your initial post should be a minimum of 300 words

Describe economies of scale and diseconomies of scale.

Economies of scale v diseconomies of scale: As companies increase their production levels, they either benefit from cost savings or incur additional costs.

Economies of scale refer to the benefits that a firm derives from increased output. When the scale of production increases, the firm incurs lesser average unit costs.

Average unit costs = total costs/total output

Based on the formula above, if you increase output as fixed costs remain the same, the average cost will reduce.

On the other hand, diseconomies of scale refer to the cost disadvantages incurred as a result of increased output. If the firm grows too large, it may reach a level of production where the economies of scale no longer work and become diseconomies of scale. This happens when the firm incurs more costs with less output.

What are the determinants of economies of scale and diseconomies of scale, respectively?

The determinants of economies of scale are factors that affect economies of scale such as fixed costs, quantity and quality of materials, and efficiency. When management is done efficiency, costs will be minimized, leading to increased economies of scale. Purchasing goods in bulk also results in reduced average costs.

On the other hand, the determinants of diseconomies of scale include poor communication, coordination problems, and poor management. When the company loses focus, it may fail to control costs effectively as production levels increase, leading to diseconomies of scale.

Using a real-world company (other than Sysco), explain the causes of economies of scale for your company.

Amazon is a company that enjoys economies of scale due to its size and expertise in technology. Expertise and technical know-how allows the firm to use technology to cut costs and achieve economies of scale. Another cause of economies of scale in the company is its size, which allows the company to buy products in bulk and enjoy discounts.

Explain how economies of scale help your company compete in its industry.

Economies of scale help the company to cut production costs and increase profit margins and growth. Amazon can also use its economies of scale to minimize costs and transfer the cost benefits to consumers by charging lower prices. This cost leadership strategy helps the company to compete successfully in the highly competitive retail industry.

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