Economies and Diseconomies of Scale - Case Study Example

International Trade By Introduction Economies of scale, are simply the benefits that a company gets because of its large size. Business experts (Kleinberg et al., 2013) also put it as the cost advantage arising because of an increase in product output. Economy of scale comes about because of the inverse relationship between the quantities being produced per unit fixed cost. That is, the larger the amount of goods being produced, the lower the fixed cost-per-unit. A large number of products share these costs. Economy scale is also able to reduce the cost of variables per unit since there are operational efficiencies and synergies. There are two divisions of the economy of scale. The internal economic scale which arises from the within the company and external economies scale, which results from extraneous aspects such as the industry size. On the other hand, studies report that the economies of scale are not just advantageous as some inefficiency can also creep in due to an increase in size. This is what business experts call diseconomies. Therefore, in the right sense of the term, economies of scale and diseconomies of scale speak about to advantages of disadvantages of a company’s productivity aptitude. These can take a different form such as moving a bigger company or installing an entire new technology. Business experts also say that these terms are more often confused with capacity utilization, which is always the extent to which the existing scale of operation is in actual use (Nash 2012). The following are the primary kind of internal economies scale Purchasing: According to Kleinberg et al (2013) companies that produce large scale should be buy raw materials in bulk, as well as the products for sale in huge amounts. These companies may cut out wholesalers by directly buying from producers. The company may also buy in large enough quantities to make very particular demands about the quality of the product, service, and specification among many others in order to for suppliers to meet their exact needs. Technical: In most cases, it is more likely to be cost effective when a company invests in more advanced production machinery and IT when doing large-scale operations. Managerial: Studies (Kleinberg et al 2013) show that big companies or production firm can afford specialist managers to help manage different functions within the business company. These can be marketing finance, human resource and many other departments within the company. Moreover, these companies may be able to afford to pay very high salaries to attract other qualified people to the company, which leads to a professional planning and better decision making. Specialization: Business companies with a larger workforce are more likely to divide the work as well as recruit new workers whose skills have a close relation to the requirements of the post. Marketing: Kleinberg et al. (2013) say that larger business firms have more options available to them. For example, television and other media, this is not cost-effective for the small business producers. Marketing cost for selling 10 million products might be no larger than 1 million products. Therefore, greater business companies might get it very easy to gain publicity for their newly launched products due to their known reputation. Financial: Larger business companies have a broad range of financial options available to them. Examples are the bank lending, stock market and bond. Moreover, Banks look at larger business companies as lower risk hence lowering the cost of borrowing (Kleinberg et al. 2013). Risk bearing: greater business firms can also be very safe from the risk of failure as production is diversified to a range of products. In the case of a downturn within the market, the greater business company is likely to have a greater resilience because there are more significant reserves and larger scope to help make cutbacks. Social and welfare: For larger business firms, it is easy to justify extra benefits for workers such as pension funds, sports, social facilities and health care. In turn, this helps attract and retain skillful employees. External economies of scale Studies (Hutchens 2010) suggest that external economies of scale results from business companies in industries of the same relation operating in a concentrated geographical location. It is more efficient for suppliers of raw materials and services to do so to all these business companies. It is even easier to justify infrastructures such as roads and sophisticated telecommunications. This will lead to a growing local pond of skilled people as all the other industries might also be training workers. This provides the area with more flexible labour market within the area. Internal and external economies of scale External economies of scale come about when all the firms within an industry undergo falling average production cost, which can be as a result of economies of concentration, information, as well as disintegration. External economies of scale, unlike internal economies of scale, are independent on individual size of the firm in the industry since both large and small businesses are beneficiaries of it (Hutchens 2010). Research reports (Hutchens 2010) reveals that internal economies of scale depend on many factors. It arises due to the technical economies that states; as a firms production scale increases, it can delegate particular jobs to its employees. Therefore through specialization employees get higher levels of skill through repetition of practices. Therefore, as productivity per employee increases, the total actual production of the firm goes up hence, reducing the average cost of products. It also depends on other factors like marketing economies. This states that purchasing bulk raw materials helps a firm enjoys low prices. This is because, huge assets as well as selling potential guarantees banks greater security. On the other hand, external economies scale depends on three primary different economies. One of which is an economy of concentration. As mentioned above, whenever firms in the industry are in proximity, they are likely to enjoy free pool of skillful labour and the provision of infrastructure from the local colleges and governments. Through such advantages, firms can attain lower average cost of production (Hutchens 2010). Diseconomies of scale Various inefficiencies can slither into a business when the company operates in a large scale. The primary diseconomies of scale are: Lack of motivation: There are many employees in a large business firms. Therefore, employees are likely to feel unappreciated. They will likely to have a feeling that they are of less value in the firm. It is, therefore, very difficult for managers in large business companies to establish the right relationship with employees. If employees’ motivation is not given much attention, then the productivity is likely to fall hence causing inefficiencies (Zhu et al. 2010). Poor communication: For smaller businesses, it is easier to make a personal communication to each member of the staff. On the other hand, in larger business firms, there is likely to be the use of written notices and letters. Studies (Zhu et al. 2010) say that, this way, messages are likely to remain unread for a very long time. Moreover, there is likely to be a misinterpretation or misunderstanding, and the staff will not be properly informed. Co-ordination: it takes a lot of time to organize situations in a larger business company. This leads to an increase in meetings and planning to make sure that the entire staff is up-to-date of what should be happening in the company. In this order, it most likely that the firm will need new management layers. The outcome effect will be an elevation in costs and creation of additional links in the communication chain. Evaluation Most firms make an effort to rise at least partially basing the economies of scale they can enjoy. Increased efficiencies and other advantages from the economies of scale are very much compelling in many industries. Another reason is so that they get to enjoy the market power, with the entire control over the suppliers and the consumers. Another reason is also the perceived success of the company merely due to its growth. This can be particularly significant for a stock listed company (Zhu et al. 2010). Diseconomies of scale do not necessarily happen because a business company is becoming larger. With efficient management and organization, these effects can be minimized to help ensure that benefits of the increased size are heavier than the disadvantages. It is also significant to remember that smaller firms are not necessarily at inconveniences in all markets. There are some markets where the economies of scale are unavailable and sometimes not compelling enough to give large firms dominion. More often, this is always the case with small local business such as plumbers and hairdressers. Moreover, success of small business can simply depend on identifying a niche market and ensuring that the business serves it perfect. Smaller business can always be more flexible and are always quick to adapt to the changes in the market and the economy (Zhu et al. 2010). Economic theory The New Trade Theory (NTT) (Ford et al. 2009), which was conceived in the 1970s have significantly changed the manner in which economist perceive international trade flows. In this mould, models consider economies of scale and product differentiation, not a different endowment of nations, as a determinant of international specialization and trade. The primary conviction of these models lies in the fact that they can explain particular features of the current trading trend, which is not in agreement with the neo-classical theory. Throughout the post-war period, trade among developed countries with similar endowments has been among the fastest growing components of the of global trade flow. Unlike in the neo-classical theory where trading opportunities ate bigger the greater are the distinctions between the productive endowments of nations. Moreover, a greater fraction of trade among industrialized countries comprises of two-way flows of similar products. It, therefore, difficult to accommodate intra-industry trade (IIT) within the neo-classical model. The neo-classical model attempts to predict that different countries attempt to specialize in different business sectors according to their comparative advantage hence exchanging a variety of products (Ford et al. 2009). Intra-Industry trade (ITT) occur when a country imports and exports similar products and services simultaneously. In this case, the products or services that can be classified in the same sector to identify similarity. For example, we can focus on the sector of cars. Intra-Industry trade arises when for instance; Germany simultaneously imports cars from Italy and at the same time exports cars to France (Ford et al. 2009). In the NTT, the scale economies, despite being a necessary condition for the appearance of intra-industrial trade, eventually leads to its termination. This result stems from the manner in which scale economies are modeled. The typical or standard new trade theory model assumes marginal costs to be below standard cost for any output level (Ford et al. 2009). Business experts (Ford et al. 2009) suggest that it is significant to learn that there is nothing like minimum efficient scale or a larger firm being more competitive. This also leads to the intuitive results that the decrease in distance costs tens to sharpen the competitive advantage of the larger incumbents. Being that the larger business, companies are the ones with the largest home market. NTT claims that integration results in a concentration of industrial operations in the nations that had previously provided the largest markets for specific range of products. However, if there is some rigidity that slows down the relocation of the industrial activity in an integrating area, then, the integration will result in an initial surge of IIT. A decline then follows once the move towards a specialized long-term equilibrium. The above pattern appears to conform very well to reversals observed in the IIT growth among industrialized nations. The impacts on the IIT of a combination of the market considerations with the modeling of scale economies can be put in a summary as follows (Ford et al. 2009). In a situation where market conditions favour location in a larger nation, the scale economies’ location pull is reinforced, and the fall of IIT increased. In a situation where the relative factor endowments is suitable for production is smaller nations, however, the IIT is likely to rise or remain high as centripetal forces are attenuated as the economic integration proceeds NTT gives a very powerful and articulate explanation on trade flows between identically endowed nations. However, this basis on two highly abstract concepts. Indefinite reducing average cost and cost less differentiability of goods. Additional studies and research might make extra efforts to put in more realistic modeling of scale economies as well as temporary and permanent limitations to business company numbers together with product specifications. The extent and the pattern of intra-industry trade within the Eurozone trading area The data that gives the statistics on the international trade, where the shareholders are members of the European Union, is very useful to the intra-industry trade with the Euro-zone. The statistics provide the possibility of evaluating the growth especially of the single market. The other advantage is that the data enables the evaluation of the consequent amalgamation of the economies of corresponding individual countries of the European Union. Moreover, the states can determine their sales and marketing policies with the findings in the statistics (Intra-European Union Trade In Goods – Current Trends 2014). The statistics depict that the in 2013, sixteen member states had negative trade balances. The largest impacts are as felt by France. France has a record that was about 89 billion Euros. UK is number two on the list. The nation has about 79 billion Euros as a cost of the negative balance. Over the period of 2002 to 2013, member states of the EU continue to be net importers of products or net exporters. Net importers in the period include France and the united kingdom while the net exporters are Czech Republic as well as Germany (Intra-European Union Trade In Goods – Current Trends 2014). On the other hand, some countries are net importers from both within and outside the European trade area. The lead of the countries includes Portugal, Croatia, the United Kingdom as well as Greece. In the case of Netherlands, the statistics relate that the state’s export to the partners in the EU is almost double the imports of the value of the goods (Intra-European Union Trade In Goods – Current Trends 2014). In the case of the service transaction, the United Kingdom was the first. The nation has a record of an extra 28 partners worth approximately 79 billion Euros. France and Germany follow in the list with a plus of 22 billion Euros and 13 billion Euros respectively (Intra-European Union Trade In Goods – Current Trends 2014). Optimum Currency area Optimum currency area (OCA) is a theory that was first published in 1961 by Robert Mundell. The theory shows that countries could form a monetary union if the costs of joining a union are lower than the benefits. Monetary union is an irreversible fixed exchange rate system. Robert Mundell describes the absence of exchange rate system as the cost of monetary unions. For instance, countries in economic trouble normally can lower the value of their currency and hence lead to increasing in exports (Sarooshi et al. 2014). However, within the union, such kind of adjustment is no longer possible since a single country cannot influence the currency. The monetary union benefits involve the gains of the escalating trade between the participating countries. This is because trade is currently not hindered by rapid alteration in exchange rates. This theory predicts that the monetary union benefits are likely to outperform its costs only when the transfer of capital, as well as labour, is high between the nations fusing in the union. For instance, if there is a certain crisis in one nation, it is likely that labour and capital will move to nations that have better economic performance hence preventing unemployment. Therefore, it is important that exchange rates adjustment within a union get a replacement with adjustment of capital as well as labour. Example The most common example of the OCA theory (Sarooshi et al. 2014) is the European Monetary fund, which was found in 1999. However, to some extent, the Maastricht criteria, which a requirement that nations need to satisfy before joining the European Monetary Union, are entirely unrelated to the criteria setup by the OCA. The present sovereign debt disaster is probably one consequence of this deficiency. For instance, there is still no liberal movement of capital and labour among the nations forming the EMU. This could have been altered by the absence of the exchange rate system. Consequently, the worried nations are likely to either suffer from high unemployment for a long period or depart the unions. Immediately they depart the union, and they can freely reduce the value of their currency hence simulating their exports and economy (Sarooshi et al. 2014).. According to Sarooshi et al. (2014), this theory needs a coordination of economic policies of federal governments. This should be within the monetary unions with much consideration to spending and taxation. This brings balance in the impact of a unified monetary policy, which is a single interest rate for the entire nations in the union. This is regardless of the different economic conditions in each independent nation. It is logic that a monetary union with a single currency will only have a single monetary policy or a single interest rate. However, such situation can be very painful. For instance, in the European Monetary Union, no common financial system exists that can reimburse for the diverse fiscal policies. Recent research (Sarooshi et al. 2014), however shows that the current increase trade intensity within the European Monetary Union had a positive influence on the cycle of business synchronization among the participating nations. This suggests that the boom in one country in turn triggers a growth in other nations too. However, the same applies in a downturn situation within the business cycle (Sarooshi et al. 2014). There are some situations where some countries are booming while others are not. This is often called asymmetric shock. These conditions are very hazardous to monetary unions since they require a different special monetary policy. This option is not available within a monetary union. For instance, if a country is experiencing a boom, it will find it very difficult to pick up since it does not independently manage its monetary supply neither does it set interest rates (Sarooshi et al 2014). Euro Zone Following the launching of the European Monetary Fund in 1979, many of the currencies from the European community attached their exchange rates around the central equivalence or parity known as the European Currency Union (ECU). There was a debate that later rose to question whether Euro zone is an Optimal Currency area (Hassoun 2011). Studies (Hassoun 2011) however unfolded the answer to the above question. Studies show that there are a lot that still need to be done for the Eurozone to meet the OCA criteria. Various aspects that an OCA needs to meet, these are; Mobility of labour and other factors of production, Financial market integration, Price and wage flexibility. Therefore, by all means, studies detail the Euro Zone is not an optimal currency area. The labour mobility is still weak, Fiscal integration, wages are still rigid, and nothing has happened in the field of fiscal Exchange rate volatility Exchange rate volatility is the tendency for foreign currency to appreciate either or depreciate. As a result, this affects the profitability of foreign exchange trade. In this case, volatility refers to the measurement of the quantity that these rates modify as well as then frequency of the changes. Exchange rates volatility comes to play in different circumstances. These include the business dealings between various parties in two separate nations as well as international investments. This volatility can be very difficult to avoid in such cases. However, using futures to lock in exchange rates is likely to reduce the impacts of the price change (Hassoun 2011). According to Hassoun (2011), volatility occurs in any security that grows or falls in value. This term often goes with the stock market, but it is significant to note that foreign currencies can as well be volatile. Whenever the exchange rates are floating exchange rates, unlike fixed exchange rates, it is likely that they will rise or go fall in value depending on the power of the economy involved. Ultimately, exchange rate volatility is a situation that affects any business activity that involves two different nations. Conclusion Being that economies of scale is the benefits that a company gets out of its large size that does not mean that small sized business companies are not beneficial. Large business companies can as well face diseconomies of scale. Diseconomies of scale are the inefficiencies that crop into a business due to its large size. Some of the inefficiencies that may likely crop into a large company are lack of motivation and poor communication. With the coming of The New Trade Theory (NTT) (Ford et al 2009), which was conceived in the 1970s, there has been a significantly change in the manner in which economist perceive international trade flows. In this mould, models consider economies of scale and product differentiation, not a different endowment of nations, as a determinant of international specialization and trade. The primary conviction of these models lies in the fact that they can explain particular features of the current trading trend, which is not in agreement with the neo-classical theory. On the other hand, Intra-Industry trade (ITT) occur when a country imports and exports similar products and services simultaneously. In this case, the goods or services that can be classified in to identify similarity. Research on this concludes that countries have for a long time preferred intra-trade within an optimum currency area. This is because of advantages such as the fixed interests and the labour mobility. Such areas are the Eurozone. Intensive studies also disclose that the Eurozone is not yet an Optimum Currency Area. This is because it is yet to meet some optimum currency area criteria such as mobility of labour and other factors of production, Financial market integration, Price and wage flexibility. Being that economies of scale is the benefits that a company gets out of its large size that does not mean that small sized business companies are not beneficial. Large business companies can as well face diseconomies of scale. Diseconomies of scale are the inefficiencies that crop into a business due to its large size. Some of the inefficiencies that may likely crop into a large company are lack of motivation and poor communication. With the coming of The New Trade Theory (NTT) (Ford et al 2009), which was conceived in the 1970s, there has been a significantly change in the manner in which economist perceive international trade flows. In this mould, models consider economies of scale and product differentiation, not a different endowment of nations, as a determinant of international specialization and trade. The primary conviction of these models lies in the fact that they can explain particular features of the current trading trend, which is not in agreement with the neo-classical theory. On the other hand, Intra-Industry trade (ITT) occur when a country imports and exports similar products and services simultaneously. In this case, the products or services that can be classified in to identify similarity. Research on this concludes that countries have for a long time preferred intra-trade within an optimum currency area. This is because of advantages such as the fixed interests and the labour mobility. Such areas are the Eurozone. Intensive studies also disclose that the Eurozone is not yet an Optimum Currency Area. This is because it is yet to meet some optimum currency area criteria such as mobility of labour and other factors of production, financial market integration, price and wage flexibility. Reference Kleinberg, Katja B., and Benjamin O. Fordham. "The Domestic Politics of Trade and Conflict1." International Studies Quarterly 57, no. 3 (September 2013): 605-619. Academic Search Premier, (accessed December 12, 2014). Nash, Peter. "THE MARITIME SHIPPING TRADE OF SCARBOROUGH, 1550 TO 1750." Northern History 49, no. 2 (September 2012): 202-222. Academic Search Premier, (accessed December 12, 2014). Toplis, A 2013, Spot In The Whole World Offers The Advantages To The Capitalist Which These Colonies Do: setting up a drapers shop in van diemens land during the 1830s, Family & Community History, 16, 2, pp. 113-127, Academic Search Premie, viewed 12 December 2014. Hassoun, N 2011, Free Trade, Poverty, and Inequality, Journal Of Moral Philosophy, 8, 1, pp. 5-44, Academic Search Premier, EBSCOhost, viewed 12 December 2014. Hutchens, A 2010, Empowering Women through Fair Trade? Lessons from Asia, Third World Quarterly, 31, 3, pp. 449-467, Academic Search Premier, EBSCOhost, viewed 12 December 2014. Intra-EU Trade In Goods - Recent Trends - Statistics Explained. (2014, May). Retrieved Dec 14 , 2014, from Ec.europa.eu: http://ec.europa.eu/eurostat/statistics-explained/index.php/Intra-EU_trade_in_goods_-_recent_trends Zhu, Z, Cerina, F, Chessa, A, Caldarelli, G, & Riccaboni, M 2014, The Rise of China in the International Trade Network: A Community Core Detection Approach, Plos ONE, 9, 8, pp. 1-8, Academic Search Premier, viewed 12 December 2014. FORD, T, LOGAN, B, & LOGAN, J 2009, NAFTA or Nada? Trades Impact on U.S. Border Retailers, Growth & Change, 40, 2, pp. 260-286, Academic Search Premier, viewed 12 December 2014. Labor Law - LMRA - Ninth Circuit Holds That Dispute Over Private Card Check Agreement Is Subject To Primary Jurisdiction Of NLRB. - International Union of Painter & Allied Trades, District 15, Local 159 v. J&R Flooring, Inc., 616 F.3d 953 (9th Cir. 2010) 2011, Harvard Law Review, 124, 7, pp. 1821-1823, Academic Search Premier, viewed 12 December 2014. Sarooshi, D 2014, Investment Treaty Arbitration and the World Trade Organization: What Role for Systemic Values in the Resolution of International Economic Disputes?, Texas International Law Journal, 49, 3, pp. 445-467, Academic Search Premier, viewed 12 December 2014. Montanari, F, & Varallo, C 2014, The EU African Swine Fever Crisis and its Impact on International Trade, European Food & Feed Law Review, 9, 4, pp. 254-258, Academic Search Premier, viewed 12 December 2014. Read More