Answer to Question #260180 in Microeconomics for boywetu

Question

Explain three types of internal economies of scale

Answer 1

Technical Economies of Scale

Technical economies of scale are achieved through improvements and optimizations within the production process. As the output increases, firms can invest in more efficient equipment and optimize operations based on experience. In other words, a large part of these optimizations occurs based on what we call learning-by-doing.

To illustrate this, let's look at two imaginary retail companies. One of them is a large corporation called Malwart, and the other one is a small brick-and-mortar store called Bob's Sporting Goods. To keep track of its inventory and optimize distribution across its several hundred stores, Malwart has recently introduced a new sophisticated software program. By contrast, Bob's Sporting Goods only has one location and a single employee (i.e., Bob). Bob still manages inventory and distribution manually. Although he could save some time using sophisticated software, it's simply not feasible for him due to his business's size and financial restrictions.

Managerial Economies of Scale

Managerial economies of scale occur based on the employment of a specialized workforce. That means as organizations grow, they can hire more experts and create specialized business units. This results in a more efficient division of labor and more effective leadership because the employees can gain more experience and focus on what they are good at.

For example, due to its size, Malwart can easily afford to employ dedicated category managers for Football, Basketball, Baseball, and every other major sport. These category managers even lead a team of several employees who focus on spotting the newest trends, evaluating the performance of current products, and negotiating the best deals with suppliers. Meanwhile, Bob can't afford to hire that many people, so he has to do all that by himself. As a result, he won't be able to handle his categories as efficiently as Malwart.

Marketing Economies of Scale 

 Marketing economies of scale emerge from the capacity to spread promoting and advertising financial plans over an expanding yield. That implies as creation expands, firms can spread (fixed) showcasing costs over a more significant outcome, which lessens per-unit costs. Moreover, enormous firms frequently benefit from a solid brand, implying they can get a higher reach and prefer promoting bargains over more modest organizations. 

To show this, expect that Malwart needs to purchase publicizing space on a board in Los Angeles at USD 10,000 every month. They can spread these expenses more than a few thousand items sold every week (per store). In the interim, Bob's Sporting Goods would need to follow through on a similar cost for the announcement, even though it doesn't almost sell as much as Malwart. Along these lines, its per-unit promoting expenses would be a lot higher, which thus would bring about a lower net revenue.

Marketing Economies of Scale 

Marketing economies of scale emerge from the capacity to spread promoting and advertising financial plans over an expanding yield. That implies as creation expands, firms can spread (fixed) showcasing costs over a more significant outcome, which lessens per-unit costs. Moreover, enormous firms frequently benefit from a solid brand, implying they can get a higher reach and prefer promoting bargains over more modest organizations. 

To show this, expect that Malwart needs to purchase publicizing space on a board in Los Angeles at USD 10,000 every month. They can spread these expenses more than a few thousand items sold every week (per store). In the interim, Bob's Sporting Goods would need to follow through on a similar cost for the announcement, even though it doesn't almost sell as much as Malwart. Along these lines, its per-unit promoting expenses would be a lot higher, which thus would bring about a lower net revenue.