Decrease Overall Average Costs Associated †Myassignmenthelp.Com

Question: Discuss About The Decrease Overall Average Costs Associated? Answer: Introducation Economies of scale refer to the advantages that accrue to a company due to the increase in the scale of production. The overall aim of expanding production is to increase output with a decrease in the overall average costs associated. The low costs enable the firm to operate in production efficiency which allows them competitive advantage in production. This allows for lower prices and higher profits in turn since the costs of production are low. Since in the long run all factors of production are varied, there are no fixed or variable costs. Therefore the benefits of economies of scale can only be experienced in the long run. The long run cost curve represents the economies of scale. When the curve slopes downwards, there are decreasing returns to scale, when the LRAC is 1 there are constant returns to scale and when the LRAC has a positive gradient there are increasing returns to scale. Returns to scale means the rate at which the marginal cost increases relative to the unit output produced. The LRAC is drawn based on the areas of tangency between the SRAC and the LRAC. There are internal and external economies of scale which are derived from the long term growth of the firm itself. For example learning by doing, specialization, monopsony power and networks created. Also the firm derives managerial economies of scale through increased investment in human capital. Also there are external economies of scale that include better research and development as well as a logistics network. These are benefits that occur outside a firm but within the industry. Diseconomies of Scale Diseconomies of scale occur when the marginal costs of producing output are higher than the actual profits that are obtained from the increase in production scale. When the LRAC slopes upwards, the diseconomies of scale begin increasing. Some examples of the diseconomies of scale compose of administrative issues, medical care as well as insurance for the employees that were engaged in order to increase the scale of production. ZTL limited is a car garage and repair company that has been in business for the last 5 years. Initially the company had three main workers but as time grew it had to hire more employees. The company was able to satisfy more clients and grow its revenues. It however was important for the company to hire more management employees in order to deal with the HR issues of the employees. Income elasticity of demand refers to how sensible the quantity demanded of a specific good is to any change in real income of consumers accounting purchase the good, with the other factors remaining constant. The formula for calculating income elasticity of demand is simple. It is found by dividing the percentage change in the quantity demanded by the percentage change in income (Khan 2012). Income elasticity of demand is often used to establish if a specific good represents a luxury or a necessity depending on its values or type. A positive income elasticity of demand represent normal, or necessity goods as the value is between zero and one and consumers will purchase them regardless of the change in their real income, for example, electricity and water. A negative income elasticity of demand, on the other hand, represents inferior goods and their demand decreases as the consumer real income increases for example margarine, a cheaper substitute for butter. The income elasticity of demand linked to luxury goods in greater than one and consumers purchase depending on how much their real income changes, for example, designer cars and jewelry. Cross price elasticity of demand evaluates how much change the demand for a specific good will experience as a result of a change in the price of another good. Cross-price elasticity of demand looks at the connection between two products, good or service by capturing the response of the quantity required for one product to an alteration in the price of another product. Its formula is equal to the percentage change in the quantity demanded of product A divided by the percentage change in the price of product B (Deaton 1987). A negative cross-price elasticity of demand represents complementary products; for example, if the demand for cars increases then the demand for fuel of increases and if the price of the complement decreases then the demand for the other good will go up. A positive cross-price elasticity of demand, on the other hand, represents two substitute products. For instance, if there is an increase in the price of coffee then consumers will buy more tea and less coffee. As for independent products, the cross-price elasticity of demand as a value of Zero as an alteration in the price of one product does not affect the demand of the other. According to the kinked curved model of an oligopoly, each company deals with two market demand curves of any of its products (Masking Tirole 1988). When the price is high the demand curve will be relatively elastic and when it is low demand will be relatively inelastic; when the two intersects the kinked?demand curve is shown. The kinked-demand curve is a characteristic of oligopolistic because of the type of competition coming from the other oligopolies in the market. In case of an increase in price oligopolies usually do not copy each but in the case of a decrease, they usually copy other. For example, in the auto industry, if Ford increases the prices of its products, GMC will not follow with an increase in the price of its products. But if GMC was to decrease the price of its products Ford will follow immediately with a decrease of its own. Reference list Deaton, A.1987. Estimation of own- and cross-price elasticities form household survey data. Journal of Econometrics, Vol. 36. Available from: https://www.princeton.edu/~deaton/downloads/Estimating_Own_and_Cross_Price_Elasticities.marketing . [13 September 2017]. Khan, S. 2012. Income Elasticities of Demand for major consumption items. Case study of Kashmir University Teachers. International Journal of Scientific and Research Publications, Vol. 2. Avialable from: https://www.ijsrp.org/research_paper_jun2012/ijsrp-June-2012-85.pdf . [13 September 2017]. Masking, E Tirole, J. 1988. A theory of dynamic oligopoly, II: Price competition, kinked demand curves, and Edgeworth cycles. Econometrica, vol. 56, no. 3. Available https://scholar.harvard.edu/files/maskin/files/a_theory_of_dynamic_oligopoly_ii_price_competition_kinked_demand_curves_and_edgeworth_cycles.pdf . [13 September 2017].