Firms and Decisions Flashcards
(16 cards)
Distinguish between internal economies of scale and external economies of scale. [10]
Write down the introduction for this essay.
Introduction
Definition: EOS are cost advantages enjoyed by firms from increasing the scale of production of the firm or the whole industry
Scope: EOS may be generated internally or externally
Overview: This essay will highlight the differences between internal EOS and external EOS, on the basis of definition, graphical representation, causes and manifestations.
Distinguish between internal economies of scale and external economies of scale. [10]
Write down the essay plan for this essay
[2 points is enough]
Introduction:
Define EOS, scope EOS as internally and external, overview of differences by definition, graphical representation, causes and manifestations
Point 1: Difference in definition
Point 2: Difference graphically
Point 3: Difference in causes [Financial EOS vs external EOS of concentration]
Point 4: Difference in causes [Specialisation and division of labour vs external EOS of concentration]
Point 5: Difference in causes [Risk bearing EOS vs economies of information]
Conclusion: internal and external EOS are different as internal EOS are enjoyed when individual firms expand while external EOS occurs when the entire industry grows.
Distinguish between internal economics of scale and external economics of scale. [10]
Elaborate on the point #1 [difference in definition]
Point: A firm enjoys internal EOS if its LRAC of production falls as it expands its output. However, for external EOS, the fall in LRAC is from expansion of the industry.
Elaboration: The cost savings that benefit the firm does not come for an expansion of its output but is a result of an external source. This external EOS can be enjoyed irrespective of the firm’s size.
Example: Internal EOS (airline firms increase number of flights to include more destinations)
External EOS (growth of the entire airline industry)
Distinguish between internal economics of scale and external economics of scale. [10]
Elaborate on point #2 [difference graphically]
Point: From Figure 1, we may see how diagrammatically, internal and external EOS are different.
Elaboration:
- Internal EOS is represented by the downward movement along the LRAC1 curve, where the cost advantages accrued (from C1 to C2) as the firm expands its output (from Q1 to Q2) .
- Contrast with external EOS which involves shift of the entire LRAC1 curve downwards to LRAC2
- entire industry grows so results in all the firms in the industry to reap these cost advantages, such as from infrastructure improvements that benefit all.
- A firm’s production can remain unchanged at Q1, and yet its costs are lowered from C1 to C3 as a result of the expansion of the entire industry
Distinguish between internal economics of scale and external economics of scale. [10]
Elaborate on point #3 [Difference in causes][Financial EOS vs external EOS of concentration]
Point and Elaboration:
- Financial EOS is a cause of internal EOS. It is enjoyed when large firms are able to get loans from lenders easily due to their large output that lends to the firm’s credibility.
- Loans taken by the large firms usually come with lower rates of interest.
- Smaller firms, such as neighbourhood grocery stores in the grocery industry, that are considered risky, established ones with a high output, such as Cold Storage, are deemed more stable and reputable.
- These financial loans taken are only feasible if the output of the firm is large enough so that potential lenders are more willing to extend loans, and with reduced rates of interest, the average cost of production is lowered.
- On the other hand, external EOS of concentration arise when the industry expands.
- As an industry expands, it may incentive financial institutions such as banks to offer loans to businesses in the industry on favourable terms.
- Competition by such financial institutions will help to reduce interest rate for loans for all firms in the industry regardless big or small.
Example:
- For example, specialised loans for Oilfield services, Technology are developed by the Canadian National Bank in response to the growing industries.
Link:
- Thus, firms in the industry will enjoy the cost savings in acquiring loans. While one EOS was due to the scale of the firm itself the other was due to growth of the industry.
Distinguish between internal economics of scale and external economics of scale. [10]
Elaborate on point #4 [Difference in causes][Specialisation and division of labour vs external EOS of concentration]
Point:
- Another source of internal EOS can be caused by economies arising from the use of labour within the firm; while external EOS can be due to concentration of firms within the industry.
Elaboration:
- Organisation EOS may be enjoyed with the division of labour within the firm.
- As the scale of production increases, the production process can be divided into many separate processes.
- The workers can then specialise their jobs.
- Workers become highly efficient in their particular job.
- Increased efficiency means workers are able to produce more in a given time then before and this reduces the average cost of production.
- The firm experiences internal EOS.
- For example, a laptop assembly plant would be able to carve out departments in assembling different parts of the laptop, such as screens, touch pad, and this would increase the efficiency of the overall assembly.
- On the other hand, as an industry expands, firms enjoy external EOS of concentration through expansion of supporting firms.
- When the industry grows, supporting firms offering raw materials and services such as accounting / auditing, will be able to specialise in their tasks.
- Specialisation leads to increased productivity and cost savings, which then can be passed onto all firms regardless of their scale.
-For example, firms buying the components (e.g. computer chips) will enjoy cost savings as the components are mass produced by the supplier (the supporting firms).
Distinguish between internal economics of scale and external economics of scale. [10]
Elaborate on point #5 [Difference in causes][Risk bearing EOS vs economies of information]
- Risk-bearing EOS is another internal EOS when a firm grows bigger.
- A large firm has greater ability to engage in high-risk and costly ventures such as research and development (R&D) as it is more financially able.
- By spreading out the risks and costs of R&D over larger output, it reduces per its average cost which is not possible for smaller firms.
- For example, pharmaceutical companies are large in scale as they invest extensively in R&D due to the nature of the industry.
- Scaling up allows pharmaceutical firms to keep average costs low.
- On the other hand, external EOS can be enjoyed when the expansion of the industry results in economies of information – cost savings as a result of accumulation and maturity of industrial knowledge.
- Work is more productive and can be done with greater efficiency as a result of greater, shared information and skills of workers working in the industry. - As such, the entire industry benefits from a larger pool of skilled workforce. The costs of production are lowered for the whole industry with the availability of more productive workers.
Explain the difference economies of scale present in the hotel industry. [10]
Write down the essay plan.
Introduction:
Define internal and external EOS (with graphical explanation); list down that there are 2 types of EOS
Point 1: Internal economies of scale present in the hotel industry.
Point 2: External economies of scale present in the hotel industry.
Conclusion
Explain the difference economies of scale present in the hotel industry. [10]
Write down the introduction.
Introduction:
Definition:
- Internal EOS can be defined as the fall in unit costs for a firm as the firm expands in size.
- This is illustrated in a firm’s diagram with a downward movement along the LRAC curve
- External EOS can be defined as the fall in unit costs for a firm as the industry expands in size.
- This is illustrated in a firm’s diagram with a downward shift of the LRAC curve.
Scope:
- There are two key types of economies of scale - internal EOS and external EOS
Explain the difference economies of scale present in the hotel industry. [10]
Write down point #1 [Internal EOS in the hotel industry]
- One form of internal EOS is that of technical economies.
- As a hotel expands its production (e.g. have more rooms etc.), there will be more workers employed and therefore there can be a greater scope for specialisation in the area of hotel operations.
- For example, there can be workers who specialise in guest relations, others who specialise in the preparation of food and others who specialise in cleaning of rooms.
- With a large number of guests, certain elements of a hotel that are indivisible can be
justified, such as a swimming pool. - With more hotel guests, the unit cost of installing and
maintaining a swimming pool would fall as the high total costs will be spread out over a
larger number of guests. - There can also be managerial economies in the hotel industry.
- A large hotel chain can justify the hiring of department managers, advertising staff,
accountants, etc. - Delegation of responsibility enables the top management to focus on long term strategic planning, which can lower unit costs over time.
- Finally, there can be marketing economies present in the hotel industry.
- A large hotel chain can potentially enjoy economies of scale by advertising for several
hotels with the same advertisement. - The cost of the advertisement space will likely not differ based on the number of brands it puts in a given space, but if the chain is able to market several of its hotels with one advertisement, there can be a fall in unit cost as the large advertising outlay is spread over several hotels.
Explain the difference economies of scale present in the hotel industry. [10]
Write down point #2 [external EOS in the hotel industry]
- Firstly, hotels can enjoy economies of concentration.
- When several hotels group together in an area, there might be auxiliary services that
arise to support their functions. - For example, laundry businesses might set up in the hotel
cluster. - The laundry services would enjoy their own internal economies of scale as they
are able to sell to a large number of hotels. - This translates to a fall in unit costs for all the hotels, simply because they had grouped together in a cluster.
- Secondly, hotels can enjoy economies of information.
- When the industry expands in a country, there is more incentive for research facilities to
be set up. - This can be by private entities or by the government.
- For example, in
Singapore, the hotel industry is one of the targeted industries in the Industrial Transformation Maps (ITMs) that are being rolled out by the Singapore Government. - This only happened because the industry is large enough such that it employs a significant
number of workers. - This would encourage the government to dedicate resources to study
and propose recommendations for the industry to make it more competitive, reducing unit
costs.
Assess whether profit maximisation should always be the goal of different hotels. [15]
Write down the essay plan
Introduction
Point 1: Profit maximisation should be the goal of different hotels
Evaluation of Point 1: Profit maximisation is not optimal for budget hotels with low BTEs in the long run
Point 2: Profit Maximisation may not be the goal for some hotels as other goals such as increasing market share are more relevant
Evaluation of Point 2: Greater incentive to maximise profit to increase market share
Conclusion [Evaluation]
[Time]
[Questioning Assumptions + Time Frame]
Assess whether profit maximisation should always be the goal of different hotels. [15]
Write down the introduction
Introduction:
Assess whether profit maximisation should always be the goal of different hotels. [15]
