A topic that shows an understanding of economics conept - Term Paper Example

Economies of Scale Wal-Mart embraces the economies scale. Fundamentally, the economies of scale refer to the cost advantages a firm enjoys due to “output, size, and scale of operation” (Boyes & Melvin, 2012). The cost per unit of output in Wal-Mart decrease with the increasing scale. The decline in the cost of the unit output stems from the fact that the fixed costs tend to spread out over the more units of outputs. Wal-Mart has a capacity of purchasing goods in bulk and receives lower average costs.

For instance, the marginal cost of purchasing ten thousand cartons of milk in substantially lower than procuring hundred boxes of the product. Wal-Mart gets a huge discount for buying the milk in large quantities. Similarly, the suppliers who deliver the ten thousand cartons enjoy the economies of scale. The cost of delivering many cartons is remarkably low. Notably, the average cost of delivering the thousand cartons is less than that of transporting hundred. In effect, the transport cost per unit reduces remarkably.

The supplier will need to pay a single driver, and the fuel cost will remain fixed. It is evident that the economies of scale benefit the firms that purchase products in large quantities. The reduction of the cost per output in turn increases the profitability of firms as in the case of Wal-Mart. The Wal-Mart economies of scale is internal. It is specific to the individual enterprise. Boyes and Melvin (2012) contend that the firms that buy products in bulk for resale benefit from the internal economies of scale known as purchasing.

Such firms reduce the expenses including the transport costs. Wal-Mart continues to gain the purchasing economies of scale for buying products from the suppliers in large quantities. Similarly, the supermarket chain achieves purchasing discount. In essence, Wal-Mart and suppliers benefit from the economies of scale by purchasing and delivering in bulk respectively. Therefore, firms should capitalize on the economies of scale to maximize profits and reduce the cost of production as exemplified by Wal-Mart.

The economies of scale enjoyed by the Wal-Mart can be used expound the patterns of global trade. In effect, the exploitation of the economies of scale can explain the growth of firms such as Wal-Mart in a particular industry. Boyes and Melvin (2012) argue that economists utilize the economies of scale justify free trade policies. Perhaps, the economies of scale, which Wal-Mart enjoys, has facilitated the expansion of the chain supermarket to many parts across the globe. The low cost of production and acquisition of goods boosts the profit margins of Wal-Mart.

The profit margin at the Wal-Mart is arguably higher due to cost advantage that stem from the increased output at lower cost per unit. The sale of the aforementioned thousand cartons of milk will yield huge profits. Thus, it is important for firms to endeavor to take advantage of the economies of scale in order to reduce the cost of the unit output and maximize profitability.ReferencesBoyes, W., & Melvin, M. (2012). Fundamental of Economics. New York: Cengage Learning.