Economies of scale, diseconomies of scale, constant returns to scale, Efficiency in production. Economies of scope and how to maximize profit when there’re two production plants, long-run equilibrium-Include Coverage from Chapters 2-6 of Science of Success
- Charles Hays
Important Definitions Economies of scale- Exist when long-run average costs decline as output is increased (Baye 185). Diseconomies of scale- Exist when long-run average costs rise as output is increased (Baye 185). Constant returns to scale- Exist when long-run average costs remain constant as output is increased (Baye 185). Efficiency in production-The ability to produce a good using the fewest resources possible. Efficient production is achieved when a product is created at its lowest average costs (Investopedia). Economies of scope- When the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately (Baye 187). Long-run equilibrium: 1) In the long run perfectly competitive firms produce a level of output such that:
P = MC
P = minimum of AC
2) In the long run monopolistically competitive firms produce a level of output such that:
P > MC
P = ATC > minimum of average costs
Economies of scale/Diseconomies of scale/Constant returns to scale
Figure 1
Figure 2
It is important to remember that the three concepts, Economies of scale, diseconomies of scale, and constant returns to scale, are interelated ideas that pertain to the average cost of a good as output is increased. These concepts are shown in the above figures, with Figure 1 showing Economies of scale and Diseconomies of scale, and Figure 2 showing Constant returns to scale.
Output
Average Costs
Economies of Scale
Increases
Decrease
Diseconomies of Scale
Increases
Increases
Constant Returns to Scale
Increases
Stays Constant
Economies of scale
Examples of this are often seen in industry. Larger companies are able to purchase input goods in higher quantity, often receiving discounts for their bulk orders. This results in lower average costs in the long run. Another great example is the ability of larger companies to purchase more efficient manufacturing equipment, which is often either too expensive for smaller companies or not effective for small quantities.
Diseconomies of scale
A great example of this concept is the Pharmaceutical industry. In order to increase the number of products that company offers, they first must spend large amounts of capitals to first develop and then test a potential drug before they can offer it for scale. Smaller companies also can suffer from diseconomies of scale due to their lack of capital. Shipping and transportation can also result in increased costs when shipping large, heavy, or potentially dangerous goods.
Constant returns to scale
In some industries average costs will scale in proportion with output. This can be achieved with the proper use of technology and software.
The following article refers to comments made by Michael Dell, founder of Dell Computers, in regards to the announcement by HP that they would no longer manufacture consumer based computers and would instead focus only on high-end server products. His assessment is that by no longer producing consumer computers, HP would likely see a rise in their production costs due to their loss of Economies of Scale. Since the release of this article, HP has reversed its decision which is likely from additional analysis of its effects. http://www.computerweekly.com/Articles/2011/10/06/248080/Expect-HP-server-price-hike-warns-Dell.htm
Efficiency in production Short-run- The time frame in which there are fixed factors of production. Long-run- The horizon over which the manager can adjust all factors of production.
In order to measure the production efficiency of a given product managers often rely on the Production Function, which is defined as a function that defines the maximum amount of output that can be produced with a given set of inputs. The Production Function is given mathematically as:
Q = F(K,L)
Where Q is the level of output produced in the production process, K is the quantity of capital, and L is the quantity of labor. This represents the maximum amount of output that can be produced with K units of capital and L units of labor.
It’s important to remember that production takes place both in the short-run and the long-run. In the short-run, certain factors of production are fixed, such as equipment. This can limit the choices available in making input decisions. The automotive industry is a great example of this. It can often take years to build additional factories and manufacturing equipment. Inputs such as labor can be increased in the short-run to increase output. This however changes in the long-run. Given enough time a company can build additional factories, secure additional capital, and hire more productive employees. For example, if it takes an automobile company two years to build a new factory, the long-run would be two years and the short-run would be less than two years.
In order to gauge production efficiency managers can use three measures of productivity, total product, average product, and marginal product.
Total product- The maximum level of output that can be produced with a given amount of inputs. Average product- A measure of the output produced per unit of input.
1) Average product of labor = AP = Q/L
2) Average product of capital = AP = Q/K Marginal product- The change in total output attributable to the last unit of an input.
1) Marginal product of capital = MP = ∆Q/∆K
2) Marginal product of labor = MP = ∆Q/∆L
Economies of scope
In the article, Economies of Scope, authors John Panzar and Robert Willig state that, “There are economies of scope where it is less costly to combine two of more product lines in one firm than to produce them separately.”(Panzar, Willig 268) You can find multiple examples of this in the marketplace. Restaurants, for example, offer multiple dishes to their customers to make better use of their equipment and labor. In order to produce both a hamburger and a chicken sandwich separately the restaurants would have to double the amount of equipment to produce both separately. Another example is a cable television provider. By offering both home telephone service, Internet access, and premium television service, they are making better use of their network infrastructure as well as increasing their profits. Below is a simple formula used to show if Economies of scope exist in a given situation.
Formula : C(Q1,0) + C(0,Q2) > C(Q1, Q2)
The above formula simply says that the cost of producing Q1 and Q2 together is less than producing them separately.
Due to the benefits afforded to companies using Economies of scope, it can act as a barrier or deterrent to other companies entering the market. If my company makes bread and your company makes both bread and sandwiches, you may be able to sell your bread for a lower price. Unless I also start making sandwiches I am at a disadvantage and may be forced out of the marketplace.
In a recent article in the Wall Street Journal, the recently announced collaboration of Comcast and Verizon show that by combining different products and services into one group, you are better able to control costs and also gain access to more efficient technologies. While both companies will remain separate, they will begin to market each other’s products along with their own. They will also work together to develop the next generation of communication networks. http://online.wsj.com/article/SB10001424052970204903804577082161265202628.html
Long-run Equilibrium
There are differences between a perfectly competitive industry and a monopolistically competitive industry when looking at the long-run equilibrium.
In the case of a perfectly competitive industry the market price of a good is equal to the marginal cost of production of that good. This reflects the value to consumers for an additional unit of output and show that producing this good is an effective use of resources and benefits society as a result.
In the long run perfectly competitive firms produce a level of output such that:
P = MC
P = minimum of AC
In a monopolistically competitive industry the market price of a good is greater than the marginal cost of production of that good. This reflects that monopolistically competitive firms produce less output than is socially desirable. This means that consumers are willing to pay more for a good than what it costs the firm to produce another unit of the good. However the firm is more concerned with making money and therefore it chooses not to produce an extra unit.
In the long run monopolistically competitive firms produce a level of output such that:
P > MC
P = ATC > minimum of average costs
Science of Success
In the book, Science of Success: How Market-Based Management Built the World's Largest Private Company, author Charles Koch, describes in great detail his philosophy of MBM or Market Based Management. This was the first book written by Koch and is still utilized to introduce new employees to the principles that manage Koch Industries Inc., which happens to be the largest privately held company in the United States and is a leading maker of natural resource-based products, including gasoline, chemicals, polymers, fibers, building products, packaging, tissue, and processing equipment. It was initially started by Charles Koch’s father, Fred Koch.
MBM is broken down into five different dimensions:
1) Vision – Determining where and how the organization can create the greatest long-term value
2) Virtue and Talents – Helping ensure that people with the right values, skills, and capabilities are hired, retained, and developed
3) Knowledge Processes – Creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability
4) Decision Rights – Ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable
5) Incentives – Rewarding people according to the value they create for the organization
Throughout the book, Koch delves into different aspects that he believes play a large role in a successful company. He accomplishes this by breaking down each dimension into its own chapter and discussing the different aspects that contribute to the successful implementation of that dimension. The use of real world examples, past experiences, and general observations, help Koch deliver the material in an easy to understand manner.
There are many different parts of the book that stand out and leave a lasting impression on the reader. When discussing government mandates, Koch states,
“But, even when faced with laws we think are counter-productive, we must first comply. Only then, from a credible position, can we enter into a dialogue with regulatory agencies to demonstrate alternatives that are more beneficial. If these efforts fail, we can then join with others in using education and/or political efforts to change the law.”
Later on in Chapter 2 Koch describes value creation,
“Successful companies create value by providing products or services their customers value more highly than available alternatives. They do this while consuming fewer resources, leaving more resources available to satisfy other needs of society. Value creation involves making people’s lives better.”
And finally in Chapter 5 when discussing the topic of trade, Koch states,
“Market economies are successful, in large part, because they are superior at creating useful knowledge. The main mechanisms of this knowledge generation are market signals from trade, prices and profit and loss, and free speech.”
Overall, the book Science of Success shows how the largest privately held company in the world started at the bottom and worked its way to the top. By using MDM to manage the company, the Koch brothers are not only built a strong company, but also a successful society that benefits employees, customers, and the market.
Works Cited
Baye, Michael. Managerial Economics and Business Strategy. 7th ed. New York: McGraw-Hill/Irwin, 2009. Print
Koch, Charles. The Science of Success: How Market-Based Management Built the World's Largest Private Company. 1st ed. Hoboken: John Wiley & Sons Inc., 2007. Print.
Panzar, John, and Robert Willig. "Economies of Scope." American Economic Review. 71.2 (1981): n. page. Print.
Jenkins, Holman. "What the deal between Verizon and its cable competitors really means." The Wall Street Journal. 7 Dec 2011. Web. 7 Dec 2011. <http://online.wsj.com/article/SB10001424052970204903804577082161265202628.html
Hall, Kathleen. "Expect HP server price hike, warns Dell." ComputerWeekly.com. N.p., 05 10 2011. Web. 7 Dec 2011. <http://www.computerweekly.com/news/2240105767/Expect-HP-server-price-hike-warns-Dell>.
Multiple Choice Questions
1) When a large company has the capability to purchase large quantities of products used in production and receive a discount, this is an example of:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
2) When a company elects to produce both cloth and t-shirts in order to reduce the production costs of both, this is called:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
3) A firm that produces batteries has noticed that as it increased production last month, its shipping expenses also increased as well, this is an example of:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
4) In order to expand their production capability to build more automobiles, a company decides to build a new factory. It will take two years to build the factory. Based on this information what is considered the short-run for this company?
a. O years
b. 0 - 2 years
c. 2 + years
d. None of the above
5) In order to expand their production capability to build more automobiles, a company decides to build a new factory. It will take two years to build the factory. Based on this information what is considered the long-run for this company?
a. 0 years
b. 0 - 2 years
c. 2 + years
d. None of the above
Answers
1 - A
2 - C
3 - B
4 - B
5 - C
Weekly Posts
October 12, 2011
I recently came across two articles that brought up the topic of Economies of Scale. The first was regarding recent comments made by Michael Dell, CEO of Dell Computers. In his remarks Michael discusses the recent decision of HP to discontinue their consumer PC business. This situation has changed since the articles was published with HP now looking at spinning their consumer PC division off into a separate entity. Dell's reasoning is that if HP stopped making consumer PC's they would no longer have either the buying power or production capability that they previously had. This would result in the rise of prices in their high end server products, which would become their primary product. Several analysts in the industry have concluded that Dell's remarks helped change the minds over at HP.
The second article discusses what role Apple Inc. will play in the tech industry, following the death of founder Steve Jobs. This articles also discusses the concept of Economies of Scale, and attributes Apple's continued success to their current dominance in the industry. By being the largest manfacturer of non-traditional tech devices such as the IPad and IPhone, Apple has the resources and capability to hold off any of its competitors. It is able to offer higher quality products at a price similar to that of their competition. Both of these articles bring up the important role that Economies of Scale plays in manufacturing. This could be especially true in the tech industry in which a consumer often has multiple products of similar capabilites from which to choose from. Often price becomes the deciding factor for them in the end.
Both of these articles bring up important points. This brings a few questions to mind.
1) If HP knew their decision would adversely impact their company overall, then why head in that direction?
2) Does Apple's dominance in the tech industry and the benefit they recieve from Economies of Scale negatively affect the end consumer by limiting their options to purchase?
October 17, 2011
I came across this article today discussing the upcoming purchase of El Paso Corp, by Kinder Morgan, two of the largest natural gas pipeline operators in North America. This will result in a combined total of around 80,000 miles of pipeline across the US. The goal behind this purchase is the ability to demand higher transport fees for use of their pipelines. This is a great example of Economies of Scale in action. When the companies were considered rivals in the marketplace, they often had to compete with each other, which resulted in lower prices for their customers. In addition to charging higher prices, their combined effort will enable them to service larger areas and expand into newly developed shale fields, which are quickly becoming a hot spot for oil and natural gas production.
This page covered different concepts including, the Five Forces Model, which is a strategic management model. The five forces are, intensity of competitive rivary, threat from new entrants, threat from sustitutes, bargaining power over buyers, and the final is bargaining power over suppliers.
Perfect Competition - Rachel Kay
This page breaks down the idea of perfect competition. This includes five conditions to be met, real world examples of perfect competition, such as the corn industry, and also included examples of real estate and gasoline.
This page discusses te various aspects of auctioning mechanics, including the type of bids, values, estimates, and the auction process.
Supply and Demand - Thaddeus Bogardus
This page breaks down supply and demand. It starts with definitions of important terms, and then discusses demand shifters, supply shifters, and includes a few real world examples.
Production, Total Costs -
This page breaks down the various costs associated with production. Including explicit costs, implicit costs, average costs, marginal costs, and sunk costs.
- Charles Hays
Important Definitions
Economies of scale- Exist when long-run average costs decline as output is increased (Baye 185).
Diseconomies of scale- Exist when long-run average costs rise as output is increased (Baye 185).
Constant returns to scale- Exist when long-run average costs remain constant as output is increased (Baye 185).
Efficiency in production-The ability to produce a good using the fewest resources possible. Efficient production is achieved when a product is created at its lowest average costs (Investopedia).
Economies of scope- When the total cost of producing two types of outputs together is less than the total cost of producing each type of output separately (Baye 187).
Long-run equilibrium: 1) In the long run perfectly competitive firms produce a level of output such that:
- P = MC
- P = minimum of AC
2) In the long run monopolistically competitive firms produce a level of output such that:Economies of scale/Diseconomies of scale/Constant returns to scale
It is important to remember that the three concepts, Economies of scale, diseconomies of scale, and constant returns to scale, are interelated ideas that pertain to the average cost of a good as output is increased. These concepts are shown in the above figures, with Figure 1 showing Economies of scale and Diseconomies of scale, and Figure 2 showing Constant returns to scale.
Economies of scale
Examples of this are often seen in industry. Larger companies are able to purchase input goods in higher quantity, often receiving discounts for their bulk orders. This results in lower average costs in the long run. Another great example is the ability of larger companies to purchase more efficient manufacturing equipment, which is often either too expensive for smaller companies or not effective for small quantities.
Diseconomies of scale
A great example of this concept is the Pharmaceutical industry. In order to increase the number of products that company offers, they first must spend large amounts of capitals to first develop and then test a potential drug before they can offer it for scale. Smaller companies also can suffer from diseconomies of scale due to their lack of capital. Shipping and transportation can also result in increased costs when shipping large, heavy, or potentially dangerous goods.
Constant returns to scale
In some industries average costs will scale in proportion with output. This can be achieved with the proper use of technology and software.
The following article refers to comments made by Michael Dell, founder of Dell Computers, in regards to the announcement by HP that they would no longer manufacture consumer based computers and would instead focus only on high-end server products. His assessment is that by no longer producing consumer computers, HP would likely see a rise in their production costs due to their loss of Economies of Scale. Since the release of this article, HP has reversed its decision which is likely from additional analysis of its effects.
http://www.computerweekly.com/Articles/2011/10/06/248080/Expect-HP-server-price-hike-warns-Dell.htm
Efficiency in production
Short-run- The time frame in which there are fixed factors of production.
Long-run- The horizon over which the manager can adjust all factors of production.
In order to measure the production efficiency of a given product managers often rely on the Production Function, which is defined as a function that defines the maximum amount of output that can be produced with a given set of inputs. The Production Function is given mathematically as:
Q = F(K,L)
Where Q is the level of output produced in the production process, K is the quantity of capital, and L is the quantity of labor. This represents the maximum amount of output that can be produced with K units of capital and L units of labor.
It’s important to remember that production takes place both in the short-run and the long-run. In the short-run, certain factors of production are fixed, such as equipment. This can limit the choices available in making input decisions. The automotive industry is a great example of this. It can often take years to build additional factories and manufacturing equipment. Inputs such as labor can be increased in the short-run to increase output. This however changes in the long-run. Given enough time a company can build additional factories, secure additional capital, and hire more productive employees. For example, if it takes an automobile company two years to build a new factory, the long-run would be two years and the short-run would be less than two years.
In order to gauge production efficiency managers can use three measures of productivity, total product, average product, and marginal product.
Total product- The maximum level of output that can be produced with a given amount of inputs.
Average product- A measure of the output produced per unit of input.
1) Average product of labor = AP = Q/L
2) Average product of capital = AP = Q/K
Marginal product- The change in total output attributable to the last unit of an input.
1) Marginal product of capital = MP = ∆Q/∆K
2) Marginal product of labor = MP = ∆Q/∆L
Economies of scope
In the article, Economies of Scope, authors John Panzar and Robert Willig state that, “There are economies of scope where it is less costly to combine two of more product lines in one firm than to produce them separately.”(Panzar, Willig 268) You can find multiple examples of this in the marketplace. Restaurants, for example, offer multiple dishes to their customers to make better use of their equipment and labor. In order to produce both a hamburger and a chicken sandwich separately the restaurants would have to double the amount of equipment to produce both separately. Another example is a cable television provider. By offering both home telephone service, Internet access, and premium television service, they are making better use of their network infrastructure as well as increasing their profits. Below is a simple formula used to show if Economies of scope exist in a given situation.
Formula : C(Q1,0) + C(0,Q2) > C(Q1, Q2)
The above formula simply says that the cost of producing Q1 and Q2 together is less than producing them separately.
Due to the benefits afforded to companies using Economies of scope, it can act as a barrier or deterrent to other companies entering the market. If my company makes bread and your company makes both bread and sandwiches, you may be able to sell your bread for a lower price. Unless I also start making sandwiches I am at a disadvantage and may be forced out of the marketplace.
In a recent article in the Wall Street Journal, the recently announced collaboration of Comcast and Verizon show that by combining different products and services into one group, you are better able to control costs and also gain access to more efficient technologies. While both companies will remain separate, they will begin to market each other’s products along with their own. They will also work together to develop the next generation of communication networks.
http://online.wsj.com/article/SB10001424052970204903804577082161265202628.html
Long-run Equilibrium
There are differences between a perfectly competitive industry and a monopolistically competitive industry when looking at the long-run equilibrium.
In the case of a perfectly competitive industry the market price of a good is equal to the marginal cost of production of that good. This reflects the value to consumers for an additional unit of output and show that producing this good is an effective use of resources and benefits society as a result.
In the long run perfectly competitive firms produce a level of output such that:
In a monopolistically competitive industry the market price of a good is greater than the marginal cost of production of that good. This reflects that monopolistically competitive firms produce less output than is socially desirable. This means that consumers are willing to pay more for a good than what it costs the firm to produce another unit of the good. However the firm is more concerned with making money and therefore it chooses not to produce an extra unit.
In the long run monopolistically competitive firms produce a level of output such that:
Science of Success
In the book, Science of Success: How Market-Based Management Built the World's Largest Private Company, author Charles Koch, describes in great detail his philosophy of MBM or Market Based Management. This was the first book written by Koch and is still utilized to introduce new employees to the principles that manage Koch Industries Inc., which happens to be the largest privately held company in the United States and is a leading maker of natural resource-based products, including gasoline, chemicals, polymers, fibers, building products, packaging, tissue, and processing equipment. It was initially started by Charles Koch’s father, Fred Koch.
MBM is broken down into five different dimensions:
1) Vision – Determining where and how the organization can create the greatest long-term value
2) Virtue and Talents – Helping ensure that people with the right values, skills, and capabilities are hired, retained, and developed
3) Knowledge Processes – Creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability
4) Decision Rights – Ensuring the right people are in the right roles with the right authorities to make decisions and holding them accountable
5) Incentives – Rewarding people according to the value they create for the organization
Throughout the book, Koch delves into different aspects that he believes play a large role in a successful company. He accomplishes this by breaking down each dimension into its own chapter and discussing the different aspects that contribute to the successful implementation of that dimension. The use of real world examples, past experiences, and general observations, help Koch deliver the material in an easy to understand manner.
There are many different parts of the book that stand out and leave a lasting impression on the reader. When discussing government mandates, Koch states,
“But, even when faced with laws we think are counter-productive, we must first comply. Only then, from a credible position, can we enter into a dialogue with regulatory agencies to demonstrate alternatives that are more beneficial. If these efforts fail, we can then join with others in using education and/or political efforts to change the law.”
Later on in Chapter 2 Koch describes value creation,
“Successful companies create value by providing products or services their customers value more highly than available alternatives. They do this while consuming fewer resources, leaving more resources available to satisfy other needs of society. Value creation involves making people’s lives better.”
And finally in Chapter 5 when discussing the topic of trade, Koch states,
“Market economies are successful, in large part, because they are superior at creating useful knowledge. The main mechanisms of this knowledge generation are market signals from trade, prices and profit and loss, and free speech.”
Overall, the book Science of Success shows how the largest privately held company in the world started at the bottom and worked its way to the top. By using MDM to manage the company, the Koch brothers are not only built a strong company, but also a successful society that benefits employees, customers, and the market.
Works Cited
Baye, Michael. Managerial Economics and Business Strategy. 7th ed. New York: McGraw-Hill/Irwin, 2009. Print
Koch, Charles. The Science of Success: How Market-Based Management Built the World's Largest Private Company. 1st ed. Hoboken: John Wiley & Sons Inc., 2007. Print.
Panzar, John, and Robert Willig. "Economies of Scope." American Economic Review. 71.2 (1981): n. page. Print.
Jenkins, Holman. "What the deal between Verizon and its cable competitors really means." The Wall Street Journal. 7 Dec 2011. Web. 7 Dec 2011. <http://online.wsj.com/article/SB10001424052970204903804577082161265202628.html
Hall, Kathleen. "Expect HP server price hike, warns Dell." ComputerWeekly.com. N.p., 05 10 2011. Web. 7 Dec 2011. <http://www.computerweekly.com/news/2240105767/Expect-HP-server-price-hike-warns-Dell>.
Multiple Choice Questions
1) When a large company has the capability to purchase large quantities of products used in production and receive a discount, this is an example of:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
2) When a company elects to produce both cloth and t-shirts in order to reduce the production costs of both, this is called:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
3) A firm that produces batteries has noticed that as it increased production last month, its shipping expenses also increased as well, this is an example of:
a. Economies of scale
b. Diseconomies of scale
c. Economies of scope
d. Constant returns to scale
4) In order to expand their production capability to build more automobiles, a company decides to build a new factory. It will take two years to build the factory. Based on this information what is considered the short-run for this company?
a. O years
b. 0 - 2 years
c. 2 + years
d. None of the above
5) In order to expand their production capability to build more automobiles, a company decides to build a new factory. It will take two years to build the factory. Based on this information what is considered the long-run for this company?
a. 0 years
b. 0 - 2 years
c. 2 + years
d. None of the above
Answers
1 - A
2 - C
3 - B
4 - B
5 - C
Weekly Posts
October 12, 2011
I recently came across two articles that brought up the topic of Economies of Scale. The first was regarding recent comments made by Michael Dell, CEO of Dell Computers. In his remarks Michael discusses the recent decision of HP to discontinue their consumer PC business. This situation has changed since the articles was published with HP now looking at spinning their consumer PC division off into a separate entity. Dell's reasoning is that if HP stopped making consumer PC's they would no longer have either the buying power or production capability that they previously had. This would result in the rise of prices in their high end server products, which would become their primary product. Several analysts in the industry have concluded that Dell's remarks helped change the minds over at HP.
http://www.computerweekly.com/Articles/2011/10/06/248080/Expect-HP-server-price-hike-warns-Dell.htm
The second article discusses what role Apple Inc. will play in the tech industry, following the death of founder Steve Jobs. This articles also discusses the concept of Economies of Scale, and attributes Apple's continued success to their current dominance in the industry. By being the largest manfacturer of non-traditional tech devices such as the IPad and IPhone, Apple has the resources and capability to hold off any of its competitors. It is able to offer higher quality products at a price similar to that of their competition. Both of these articles bring up the important role that Economies of Scale plays in manufacturing. This could be especially true in the tech industry in which a consumer often has multiple products of similar capabilites from which to choose from. Often price becomes the deciding factor for them in the end.
http://news.medill.northwestern.edu/chicago/news.aspx?id=190199
Both of these articles bring up important points. This brings a few questions to mind.
1) If HP knew their decision would adversely impact their company overall, then why head in that direction?
2) Does Apple's dominance in the tech industry and the benefit they recieve from Economies of Scale negatively affect the end consumer by limiting their options to purchase?
October 17, 2011
I came across this article today discussing the upcoming purchase of El Paso Corp, by Kinder Morgan, two of the largest natural gas pipeline operators in North America. This will result in a combined total of around 80,000 miles of pipeline across the US. The goal behind this purchase is the ability to demand higher transport fees for use of their pipelines. This is a great example of Economies of Scale in action. When the companies were considered rivals in the marketplace, they often had to compete with each other, which resulted in lower prices for their customers. In addition to charging higher prices, their combined effort will enable them to service larger areas and expand into newly developed shale fields, which are quickly becoming a hot spot for oil and natural gas production.
http://www.reuters.com/article/2011/10/17/us-kindermorgan-idUSTRE79F20Y20111017?feedType=RSS&feedName=topNews&rpc=71&google_editors_picks=true
Summaries
Five Forces Analysis - Jonathon Barnett
This page covered different concepts including, the Five Forces Model, which is a strategic management model. The five forces are, intensity of competitive rivary, threat from new entrants, threat from sustitutes, bargaining power over buyers, and the final is bargaining power over suppliers.
Perfect Competition - Rachel Kay
This page breaks down the idea of perfect competition. This includes five conditions to be met, real world examples of perfect competition, such as the corn industry, and also included examples of real estate and gasoline.
Optimal Auctioning Mechanisms - Kelli Schoon-Saxsma
This page discusses te various aspects of auctioning mechanics, including the type of bids, values, estimates, and the auction process.
Supply and Demand - Thaddeus Bogardus
This page breaks down supply and demand. It starts with definitions of important terms, and then discusses demand shifters, supply shifters, and includes a few real world examples.
Production, Total Costs -
This page breaks down the various costs associated with production. Including explicit costs, implicit costs, average costs, marginal costs, and sunk costs.