Economies & Diseconomies Of Scale

Economies of scale are the cost advantages from expanding the scale of production in the long run. The effect is to reduce average costs over a range of output. These lower costs represent an improvement in productive efficiency and can give a business acompetitive advantage in a market. We make no distinction between fixed and variable costs in the long run because all factors of production can be varied. As long as the long run average total cost curve (LRAC) is declining, then internal economies of scale are being exploited. The table below shows how changes in the scale of production can, if increasing returns to scale are exploited, lead to lower long run average costs. Much of the new thinking in economics focuses on the increasing returns available to a company growing in size in the long run. An example of this is the software business. But the marginal cost of one extra copy for sale is close to zero, perhaps just a few cents or pennies.

If a company can establish itself in the market, positive feedback from consumers will expand the installed customer base, raise demand and encourage the firm to increase production. Because marginal cost is so low, the extra output reduces average costs creating economies of size. Lower costs normally mean higher profits and increasing financial returns for the shareholders. What is true for software developers is also important for telecoms companies, transport operators and music distributors. We find across many different markets that, when a high percentage of costs are fixed the higher the level of production the lower will be the average cost of production. Strong demand means that capacity utilization rates are high and this lowers the unit cost of supply. The long run average cost curve (LRAC) is known as the ‘envelope curve’ and is usually drawn on the assumption of their being an infinite number of plant sizes – hence its smooth appearance in the next diagram below.

The points of tangency between LRAC and SRAC curves do not occur at the minimum points of the SRAC curves except at the point where the minimum efficient scale (MES) is achieved. If LRAC is falling when output is increasing then the firm is experiencing economies of scale. For example a doubling of factor inputs might lead to a more than doubling of output. The working assumption is that a business will choose the least-cost method of production in the long run. Moving down the LRAC means there are cost advantages from a bigger scale of operations. Internal economies of scale come from the long-term growth of the firm. These refer to gains in productivity from scaling up production. Expensive (indivisible) capital inputs: Large-scale businesses can afford to invest in specialist capital machinery. For example, a supermarket might invest in database technology that improves stock control and reduces transportation and distribution costs. Specialization of the workforce: Larger firms can split the production processes into separate tasks to boost productivity.

Examples include the use of division of labour in the mass production of motor vehicles and in manufacturing electronic products. 1. The application of this law opens up the possibility of scale economies in distribution andfreight industries and also in travel and leisure sectors with the emergence of super-cruisers such as P&O’s Ventura. Consider the new generation of super-tankers and the development of enormous passenger aircraft such as the Airbus 280 which is capable of carrying over 500 passengers on long haul flights. 2. The law of increased dimensions is also important in the energy sectors and in industries such as office rental and warehousing. Amazon for example has invested in several huge warehouses at its central distribution points – capable of storing hundreds of thousands of items. Learning by doing: The average costs of production decline in real terms as a result of production experience as businesses cut waste and find the most productive means of producing output on a bigger scale.

Benefits Of Economic Growth

Economic growth is a phrase used to indicate the increase in per capita GDP (gross domestic product). Many other factors like increase in aggregate income of the individuals of a nation also reflect economic growth. Economic growth is usually calculated as the rate with which GDP changes in a particular period. The number of goods and services produced by a country is a reflection of economic growth in that country. It can either be negative or positive depending upon the decrease or increase when compared to data of previous years. Negative growth is often associated with economic depression and economic recession. Whenever the GDP of a country increases it means there is economic growth which is quite beneficial for the country, its people and the global economies. 1. Improves living standards. Economic growth is vital to a country in bringing about an improvement in the living standards of its people. It also helps to reduce the rates of poverty for people of low incomes. This is principally true for underdeveloped and developing countries where growth is considered a principal method of reducing poverty among the populace. 2. High rate of employment.

Economic growth results in bringing a high rate of employment. When firms and businesses produce more outputs, their internal requirement for people gradually increases. They bring in more people to work, thus increasing the rate of employment. 3. Increased capital investment. As an accelerator effect of economic growth there is an increase in capital investment. As a result ,economic growth is sustained for long periods of time. 4. Benefits to the Government. Economic growth brings in higher tax revenues for the government, making it stronger. Along with this ,the government spends less amount of money as unemployment benefits. 5. Increased fiscal dividend. Government finances are usually of a cyclical nature. As the country’s economy boosts up, more tax revenues flow into the Government Treasury. This provides the government with additional money, which can be used for financing other projects that might lead to further development. 6. Enhanced business confidence. Economic growth creates a positive impact on the confidence that people should have when they are running their businesses. As profits of small firms and businesses gradually increase with economic growth, their business confidence rises and they exert more efforts to grow big. 7. Superior public services. When economic growth brings about an increase in government income, the government can spend more on public services like education and NHS, thus resulting in superior public services. However, nothing in this world comes for free and same is the case with economic growth. The human population is continuously engaged in extraction of natural resources which are non -renewable. With this rapid rate of extraction we will not be able to sustain this growth for very long periods of time. Thus, we should take sufficient care to keep these extractions within prescribed limits so that growth can be sustained for long.

Several other countries are distancing themselves from the dollar. In November 2010, Russia and Chian signed an agreement to trade in their local currencies. Germany agreed to conduct trade in yuan and Euro to China. Germany, a long- time ally of the United States, has also made agreements with the Chinese government to conduct trade in yuan and euros. Lastly, the IMF, the International Monetary Fund, called for an alternative for the dollar in February 2011. The United Nations as well wants a new global currency. It is clear that the New World Order is all about reverting to the world order in Babylon governed by Nimrod. Jared Kushner has been appointed the special envoy to the Middle East. He will work on brokering a deal, something that no one else has achieved before. International leaders are very frustrated at the lack of progress of any peace deal. The sticking point is the refusal of Netanyahu to relinquish Israeli sovereignty over Jerusalem.

He doesn’t want to share Jerusalem with the Palestinians. The catch 22 is that PA Chairman Mahmoud Abbas insists that Jerusalem must be involved as the Palestinian capital. Another sore point is the proposal to have Israel withdraw all land captured during the 1967 from the Palestinians. This includes East Jerusalem and the Golan Heights. The Arab Peace Initiative calling for a 2 state solution depends on the return of the land and to acquire East Jerusalem as their capital. Yet Israel will have none of it. The Israelis believe it is their God-given right to own Jerusalem. Israel also claims that they need the security by keeping military strategic lands captured in the 1967 six day war. What will happen if there truly is no way to solve the problem? Then surely a clean slate would be needed? We all know that significant changes always happen after war. Would World War 3 seriously damage Israel?

Why Are Some Countries Rich And Others Poor?

Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national Product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used….. Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material….

Why are some countries rich and others poor? Why do some countries experience sustained levels of high growth that propel them into the ranks of the rich while others stagnate, seemingly in perpetuity? These are perhaps the most fascinating and important questions in all of economics…. Since the late 1980s, economists have done extensive work on the determinants of economic growth. As yet, however, there are few widely agreed-on results. The lack of consensus is unfortunate because increasing the growth rates of the world’s many poor countries is a primary global policy goal. We do have at least two natural experiments in which a single nation was bisected by very different forms of governments: the two Germanys from the end of World War II to reunification in 1991, and the two Koreas…. Investment is usually the result of forgoing consumption. In a purely agrarian society, early humans had to choose how much grain to eat after the harvest and how much to save for future planting. The latter was investment.

In a more modern society, we allocate our productive capacity to producing pure consumer goods such as hamburgers and hot dogs, and investment goods such as semiconductor foundries. If we create one dollar worth of hamburgers today, then our gross national product is higher by one dollar. If we create one dollar worth of semiconductor foundry today, gross national product is higher by one dollar, but it will also be higher next year because the foundry will still produce computer chips long after the hamburger has disappeared. This is how investment leads to economic growth. Without it, human progress would halt…. Kevin Kelly on the Future, Productivity, and the Quality of Life. Kevin Kelly talks with EconTalk host Russ Roberts about measuring productivity in the internet age and recent claims that the U.S. Then the conversation turns to the potential of robots to change the quality of our daily lives.

Paul Romer on Growth, podcast on EconTalk with Paul Romer (subsequently awarded the Nobel Prize). Paul Romer, Stanford University professor and Hoover Institution Senior Fellow talks with EconTalk host Russ Roberts about growth, China, innovation, and the role of human capital. Also discussed are ideas in creating growth, the idea that ideas allow for increasing returns, and intellectual property and how it should be treated. This 75 minute podcast is a wonderful introduction to thinking about what creates and sustains our standard of living in the modern world…. William Easterly of NYU talks about why some nations escape poverty while others do not, why aid almost always fails to create growth, and what can realistically be done to help the poorest people in the world…. Author Gregg Easterbrook talks about the ideas in his latest book, The Progress Paradox: How Life Gets Better While People Feel Worse. How has life changed in America over the last century?