Answer to Question #94215 in Microeconomics for Lusanda Mrasi

Question

By referring to a minimum of three factors,comprehensively discuss how firms in the service industry can achieve economies of scale.

Answer 1

Economies of scale describe the cost advantage that a firm acquires due to its scale of production. At a high scale of production, a firm is able to reduce its cost per unit of output leading to a decrease in average costs in its long-term operations. In the service industry, economies of scale can be achieved through input costs, technology and outsourcing of services. Input costs refer to the cost incurred while acquiring materials or services essential for achieving a particular output. Decreasing input cost is achievable through a purchase of materials in bulk hence reduced spending that leads a firm in the service sector to achieve economies of scale. Technology in the service sector is critical since it leads to efficiency. Efficiency reduces costs in achieving an output, therefore, leads to a firm achieving economies of scale. Outsourcing of services as a strategy to achieve economies of scale focus mostly on a firm in the service industry sourcing for services it cannot efficiently offer. The major premise in outsourcing is that the services outsourced have to lead to cost decrease on the outsourcing firm hence leading to economies of scale.