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Supply: Production, Costs, and Profits - Essay Example

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John (2009) define economies of scale as the cost benefits derived by a company as a result of expansion. The cost benefits are mainly achieved in that as a company expands it begins to produce its goods and services in large quantities thereby resulting in…
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Supply: Production, Costs, and Profits
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Supply: Production, Costs, and Profits

Download file to see previous pages... scale, on the other hand, is realized when a firm expands its scope of operation outside a firm, such as improving its transport network thereby resulting in decreased cost for a firm working within the industry (Harrison and St. John, 2009).
There are several ways through which a firm can benefit from the economies of scale. Firstly, a company can benefits from the economies of scale through reduced input costs. This is achieved because when a firm purchases its inputs in large quantities, this enables it to take advantage of discounts offered as a result of bulk purchases (Harrison and St. John, 2009).
Secondly, a firm will benefit from large economies of scale since it results in reduced average production and selling cost. For instance, certain costs such as advertising, research and development, skilled labor and expertise are generally expensive for small firms. However, economies of scale enhance the efficiency of these inputs thereby resulting in reduced cost of selling and production (Harrison and St. John, 2009).
Thirdly, a firm is likely to benefit from the economies of scale in that as the production capacity of a firm increases, it will be able to acquire specialized machineries and labor resulting in improved efficiency. This is because employees would be better qualified on their jobs, thereby spending less time on their work, with greater accuracy resulting in reduced wastages (Harrison and St. John, 2009).
As much as a company can benefit from being part of a large corporation, there are also disadvantages associated with being part of a large corporation. Firstly, large corporations are subjected to many legal and tax work, which might be disadvantageous to subsidiaries (Pride, Hughes, and Kapoor, 2012). For instance, large corporation as subjected to double taxation whereby all profits are taxed once. Secondly, there is a lot of limitation as regards management and strategic decision-makings, which are mainly made by a large company (Pride, ...Download file to see next pagesRead More
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