Unformatted text preview: markets.
— Reputation effects and umbrella branding.
• Purchasing Economies. — Cheaper in bulk. • Incentive and Bureaucracy Effects.
• Spreading Speed Resources Too Thin. e.g. The excellent chef. ECL 2-20 R.E. Marks ECL 2-21 R.E. Marks 2.5.5 The Learning Curve 2.5.6 The Learning Curve v. Economies of Scale The importance of experience, or learning by
doing. ECL 2-22 The former: reductions in unit cost with
accumulating experience and production.
The latter: reductions in unit cost with a larger
scale per period. Economies of scale: the cost advantages ﬂowing
from producing a larger ﬂow of output in a given
The learning curve (or experience curve): the cost
advantages ﬂowing from accumulating experience
A progress ratio is the ratio of average costs after
and before cumulative production increases:
AC 2 AC 1 , where AC 2 is the Average Cost at
cumulative output Q 2 and AC 1 is the Average
Cost at cumulative output Q 1 , where Q 2 = 2Q 1 .
The median progress ratio is about 0.80, which
means that for the typical ﬁrm doubling
cumulative output reduces unit costs by about
Such learning and cost reductions may slow and
eventually be exhausted.
Learning by doing applies to quality as well as to
costs. Learning economies can be substantial even when
economies of scale are minimal:
Economies of scale can be substantial even when
learning economies are minimal:
e.g. simple capital-intensive activities, such as can
If a large ﬁrm has lower unit costs because of
economies of scale, then any cutbacks in
production will raise unit costs.
If lower costs are the result of learning, then
cutbacks do not necessarily result in high unit
costs. R.E. Marks ECL 2-23 2.6 The Importance of Scale and Scope
Economies: Firm Size, Proﬁtability, and
Economies of scale and scope provide large ﬁrms
with an inherent cost advantage.
This encourages small ﬁrms to try to grow, but
limits the numbers of ﬁrms that can successfully
compete. 2.6.1 Scale, Scope, and Firm Size
Scale and scope economies give large ﬁrms an AC
advantage over small ﬁrms.
In industries where buyers are price sensitive,
large ﬁrms can pass along some of their AC
advantage to consumers, which drives small (and
therefore higher-AC) ﬁrms out of business or into
If small ﬁrms are to match the low AC of large
ﬁrms, they must grow, through:
• retained earnings,
• increased equity,
• higher debt
• product portfolio management (Cash Cows v. Rising Stars etc.)
• new product development
• geographical diversiﬁcation
• mergers R.E. Marks ECL 2-24 Corporate mergers may be “synergistic”: synergies
are economies of scale waiting to be exploited —
should a merger be permitted between two large
ﬁrms which may create some market (or
monopoly) power if the merger allows the new ﬁrm
to achieve substantial efﬁciencies through
economies of scale? R.E. Marks ECL 2-25 R.E. Marks ECL 2-26 2.6.2 M...
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- Fall '13
- Microeconomics, Economics of production, R.E. Marks