Long Run Average Cost And Economies Of Scale WLOS 3 4 Clos 1

Long Run Average Cost And Economies Of Scale Wlos 3 4 Clos 1 2

Prior to beginning work on this discussion, read David Trainer’s article, Sysco Feasts on Economies of Scale for Strong Competitive Advantage, as well as Chapter 8 in your textbook, and respond to the following: How can the long-run average cost (LRAC) curve be derived from the short-run average total cost (SRATC) curve? Describe economies of scale and diseconomies of scale. What are the determinants of economies of scale and diseconomies of scale, respectively? Using a real-world company (other than Sysco), explain the causes of economies of scale for your company. How would economies of scale help your company compete in its industry? Your initial post should be a minimum of 300 words.

Paper For Above instruction

The relationship between the long-run average cost (LRAC) curve and the short-run average total cost (SRATC) curve is fundamental in understanding how firms plan their production strategies over time. The LRAC curve can be derived from the envelope of various SRATC curves, each representing different sets of fixed inputs. Essentially, when a firm considers adjusting all inputs in the long run, it chooses the most cost-efficient combination at each level of output, which causes the LRAC curve to be the lower boundary that touches all possible SRATC curves. This process involves plotting multiple SRATC curves corresponding to different plant sizes or fixed inputs and then enveloping them to form the LRAC. The LRAC curve is typically U-shaped owing to economies and diseconomies of scale that influence cost efficiencies as output changes (Mankiw, 2018).

Economies of scale refer to the cost advantages that a firm experiences as it increases its output, leading to a reduction in average costs. Conversely, diseconomies of scale occur when increasing production results in rising average costs. These phenomena are driven by various determinants. Economies of scale are often caused by factors such as specialization of labor, technological advancements, bulk purchasing of inputs, and more efficient use of capital. For example, large firms can negotiate better prices for raw materials and benefit from technological innovations that reduce per-unit costs (Pindyck & Rubinfeld, 2017). On the other hand, diseconomies of scale are usually driven by management inefficiencies, coordination problems, and overextension of resources, causing overhead and bureaucratic costs to escalate with increased output (Samuelson & Nordhaus, 2010).

A real-world example of a company that benefits from economies of scale is Amazon. As a global e-commerce and logistics company, Amazon leverages its vast scale to negotiate better deals with suppliers, optimize its distribution network, and invest in advanced technology infrastructure. The massive scale of Amazon's operations allows it to spread fixed costs such as distribution facilities and technological investments over a large volume of sales, significantly lowering its average costs (Danziger & Barnes, 2022). This cost advantage affords Amazon the flexibility to offer competitive pricing, invest in innovation, and expand its market share, thereby reinforcing its competitive position within the industry.

In conclusion, economies of scale provide substantial strategic advantages by reducing costs and enabling firms to compete more effectively. By understanding how the LRAC is derived and identifying the factors influencing economies and diseconomies of scale, companies can make informed decisions about expansion and operational efficiency. Amazon exemplifies how leveraging economies of scale can lead to sustained competitive advantage, ultimately fostering growth and profitability in a highly dynamic industry.

References

• Danziger, P. N., & Barnes, B. (2022). Amazon’s Growth and Cost Strategy. Journal of Business Strategy, 43(2), 64-73.
• Mankiw, N. G. (2018). Principles of Economics (8th ed.). Cengage Learning.
• Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.