ECONOMIES OF SCALEby Bwalya Bwalya | 05-02-2019 03:33 |
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Economies of scale occur whenever a firm¡¯s marginal cost of production decreases. They can result from changes on a macroeconomic level, such as reduced borrowing costs or new infrastructure or from improvements on a business specific level. Therefore, a firm can sometimes realize economies of scale or diseconomies of scale based on variables outside of its control. Economies of scale can be defined as the cost advantage that enterprise obtain due to their scale of operation with cost per unit of output decreasing with increasing scale. The two types of economies of scale that exist are external and internal economies of scale. External economies of scale being based on larger changes outside the firm while internal economies of scale are firm-specific or caused by the firm. Both types result in declining marginal costs of production, yet the net effect is the same (Stigler, 1958). Scherer (1975) states that globalization has led large businesses to realize greater external economies of scale by allowing them pursue cheaper resources around the world. For instance, the invention of the internet has created external economies of scale for businesses of all types by reducing cost required to gather information, communicate with customers and partners and also speed up operations. Globalization allows the productivity of the world to be maximized by allowing increased specialization division of labor economies. On the other hand, internal scale of trade arises due to several factors. This may be as a result of improvement in the capital equipment and production processes that a firm uses. An example in a micro sense is an employee who uses a keyboard. They can increase their marginal productivity by becoming better typists hence reducing the cost and time of each additional word typed (Penrose, 1959). Additionally, some large reputable firms can realize financial internal economies of scale by borrowing funds at a lower interest rate than their competitors. Lower rates reduce interest costs of capital expansion. This allows additional units to be produced with fewer input costs (Shanley, 2009). A cost benefits analysis is a process by which business decisions are analyzed. The benefits of a given situation or business related action are summed up and then the cost associated with taking that action are subtracted (Liebhafsky, 1968). The desire for traceable products is a by-product of a never ending series of food scandals, and it comes alongside a growing ethical outlook that embraces organic food production, ethical consumption and a concern for animal welfare. Moreover, the benefits of local, fresh, organic and good quality food have been promoted by chefs in the media, by food writers and bloggers as well as environmental groups. Locally grown food passes the cost benefit test in that the produce ensures higher nutritional values when compared with imported produce that has suffered from lengthy transport times. The sincere concern for reducing one¡¯s carbon footprint is coupled with the personal reassurance of not buying products made in distant countries. During the journey, nutrients locked into these goods vanishes with each passing minute until the food displayed on supermarket shelves has lost over half of their nutritional value compared when they were picked (Pratten, 1988). Furthermore, produce that has been transported overnight to nearby superstores or is sold from local farmer¡¯s market is usually displayed at the peak of its ripeness. This freshness not only invariably tastes better but is also healthier. There is greater transparency of how food is produced when it comes to locally produced food stuff as compared to imported food stuff. This is so because customers are able to directly ask questions about how food is grown and harvested placing them in a better position to analyze whether these methods align with their beliefs (Silberston, 1972). Buying more local produce over a longer stretch of time can alleviate the need for supermarkets to routinely transport goods over longer distances. Decreasing the size and number of orders for specific products would then create the knock-on effect of reducing both the numbers of planes, trains, ships and the emissions these modes of transport emit into the atmosphere. Buying local produce is one way of supporting local farmers. The more money farmers receive, the greater the chance of thriving farms populating the country for future generations to come. Additionally, this makes farmers less likely to sell their land to urban developmental projects. Not only does this allow farmers to sustain or expand their businesses but maintain the naturally beautiful countryside for local residents, travellers and tourists to admire and appreciate. Furthermore, well managed farms also provide valuable support to surrounding ecosystems by conserving rich fertile soil and water sources for surrounding habitats. In conclusion, buying local products is the way to go about shopping. This is because by doing so they maintain a small carbon footprint, emphasizing freshness, taste and purity of food produce as well as taking care of the local environment. REFERENCES G.J. Stigler, ¡°The Economies of Scale,¡± Journal of Law and economics, Vol. 1, 1958, pp. 54-71 F.M. Scherer, ¡°Economies of Scale and Industrial Concentration,¡± International Institute of Management, Beriln, 1975, p.23 E.T. Penrose, ¡°The Theory of the Growth of the Firm,¡± Wiley, New York, 1959, p.43 M.Shanley, ¡°Economics of Strategy,¡± Wiley, New York, 2009, p.90 H.H. Liebhafsky, ¡°The Nature of Price Theory,¡± Dursey Press, Cambridge, 1968, p.241 C.F. Pratten, ¡°A Survey of the Economies of Scale,¡± Columbia University, New York, 1988, p.27 A. Silberston, ¡°Economies of scale in Theory and Practice,¡± The Economic Journal, Vol.82, No. 325, 1972, pp. 369-391. |
