The main reason that firms diversify is to achieve economies of scope

For example, McDonalds offers a range of different products e. Of course, there are current costs associated with these assets, and some of them will likely vary, at least in part, according to the level of output, such as maintenance and security.

This section examines the union effect on particular benefits, primarily paid leave, health insurance, and pensions. Each product shares overhead costs such as food storage, preparation facilities, restaurant space, toilets, car parks and play equipment. Evidence from the CPS.

Bloom, and Richard B. Fear of employer-imposed penalties and employer disinformation are important other factors weighed by workers deciding whether to act. The table shows that unionized workers are 3. Economies of scale are cost savings that occur as a result of making more of a product.

Dividing your production process into separate tasks can increase productivity, and your workers will likely become more specialized and efficient. Union membership significantly increases the likelihood that a worker will file a claim or report an abuse.

These improvements, which arise from the ability to eliminate costs by operating two or more businesses under the same corporate umbrella, exist whenever it is less costly for two or more businesses to operate under centralized management than to function independently.

External and Internal Costs[ edit ] External costs are discussed more in Negative externalities Economics has a long tradition of distinguishing those costs which are fully internalized by economic agents internal or private costs and those which are not external or social costs.

Another estimate, which includes vacations and holidays, indicates that union workers enjoy Table 5 illustrates the union impact on union, nonunion, and average wages among workers with a high school education.

Purchasing Bulk buying can cut costs dramatically, as in the brochure example, above. All of these estimates are based on statistical analyses that control for worker and employer characteristics such as occupation, education, race, industry, and size of firm. Unions reduce wage inequality because they raise wages more for low- and middle-wage workers than for higher-wage workers, more for blue-collar than for white-collar workers, and more for workers who do not have a college degree.

Finally, we are assuming that pricing, meaning the exchange of property rights, is possible. The leave taker is guaranteed the same or equivalent position upon return. Unions, wage, and skills. Labor legislation and unionization are best thought of as complements, not substitutes.

Economies of Scope

As long as these prices reflect all costs, markets will provide the required, desirable, and economically efficient amount of the good or service in question. These are fixed costs that remain the same no matter how many brochures you produce. Differences in union and nonunion earnings in blue-collar and service occupations.

Empirically, this means a 20 percentage point change in unionization density from zero to 20 may have no effect, but a change from 20 to 40 will have an effect.

Business Ethics

And sometimes the external environment also provides economies of scale, based on factors such as industry size or geographic location. So, while you may incur initial extra costs by investing in new machinery, additional labor or more raw materials, you save money on the average cost of each unit you produce see Figure 1, below.

The ability to take the risk of carrying out complicated and expensive research is another benefit for large firms. The long run average cost curve, however, is formed by the envelope of the short run average cost curves. Rather, they occur only to a certain level of output, or business size, and then diseconomies of scale, or decreasing returns to scale can set in, resulting in a U-shaped cost curve i.

This basic principle has been the driving force behind many major economic developments, such as the industrial revolution and mass production. Relevance The title of that landmark article may not sound very appealing, but it does make clear that economies of scope and economies of scale are closely related concepts.

Product Diversification Strategy

Large fixed costs, and hence large economies of scale, are prevalent in highly capital intensive industries such as railroads, steelmaking, petroleum refining, aircraft manufacturing and semiconductor production.

As a result, it can negotiate favourable deals with freight companies. Reduce transportation costs if common ownership results in closer geographic proximity. Lower per unit costs allow a company to do one of three things: However, without property rights to the commodities of clean air or quiet, it is difficult to imagine the formation of markets.

Different Ways to Achieve Economies of Scope Economies of scope are essential for any large business, and a firm can go about achieving such scope in a variety of ways. The simple model of perfect competition i. For example, nonunionized high school graduates the largest category of workers in the United States earned 2.

However, these costs often tend to be relatively small relative to the costs of the main production assets themselves.

Transportation Economics/Costs

This type of industry is referred to as a natural monopoly.Reasons for acquisition failure include: ineffective integration of the acquisition, too high of a premium paid for the common stock of the target company, or inability to understand how the assets of the acquired firm would fit with the lines of business of the existing company.

"Competitiveness Through Management of Diversity: Effects on Stock Price Valuation," another report, found that firms that received Department of Labor awards for their success in implementing voluntary affirmative action policies are rewarded for their success with a boost in their share price within 10 days of the announcement.

Firms in with emerging economies may want to form strategic alliances with firms from developing countries because: a. it gains access to the foreign firm's sophisticated technology.

Economies of Scale Definition

Economies of scope refers to the cost characteristic that a single firm multi-product technology is less costly than a single product multi-firm technology. It, therefore, is addressing the issue of the cost of adding another product to the product line.

Inter-product complementarity is. Economies of Scale: Oligopoly firms are also able to take advantage of economies of scale that reduce production costs and prices. As large firms, they can "mass produce" at low average cost. As large firms, they can "mass produce" at low average cost. A business owner needs to consider efficient diversification strategies to build a competitive advantage, to achieve economies of scale or scope, and/or to take advantage of a financial opportunity that aligns with the business' strategic plan.

Achieving Economies of Scale Download
The main reason that firms diversify is to achieve economies of scope
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