Economies of Scale
Essay Writing Skills - IGCSE Example 1
Case Study (Hypothetical): A group of airlines has been created by 10 airlines companies that act as a giant single airline company. This group of airlines shares their operational facilities and routes when needed. As a result, users of airline services get to enjoy more choices. A small airline company namely Y-airlines has joined the group recently. After joining it has gained a greater amount of popularity among the air travelers due to the group`s intensive media campaigning.
Economies of Scale
Considering the information given above use your economics knowledge and discuss the benefits of internal economies of scale for the Y-airlines after joining the group.
The possible discussion may look like as stated below;
Coming straight to the point, it is likely that a smaller airline company like Y-airlines joining the group would let it enjoy the benefits of internal economies of scale as the group of airlines companies acts as a giant single firm that experiences an increase in size whenever a new airlines company joins the group. The more member joins the bigger the size the larger the benefits of economies of scale.
Well! speaking about economies of scale, it occurs when the average costs of a firm fall as the firm expand its size in the form of increasing its production capacity.
Economies of Scale
Y-airlines joining the group will make the group larger than before in size causing them to have a greater low costs advantage due to a fall in average costs. As the low-cost advantage comes with the expansion of size, so this will be termed internal economies of scale. A firm may experience internal economies of scale due to its purchasing, marketing, technical, financial, managerial, and risk-bearing abilities on a large scale.
By joining the group, Y-airlines is able to operate as if it is a large airline company due to the provision of the use of the facilities availed by the other 10 airlines companies and share the costs among the group members.
Y-airlines can share the marketing costs, such as advertising with some of the other members in the group, which will cause its marketing cost to be lower leading to an advantage of internal economies of scale namely marketing economies.
Not only that, Y-airlines could be able to offer more routes to the passengers granted by the group with more technical expertise to improve the technical flaws while flying many routes. This will cause Y-airlines to experience technical economies of scale as the average cost is likely to fall due to more sales of the ticket and less occurrence of accidents.
Economies of Scale
Y-airlines would also benefit from the purchasing economies of scale when the group will make a purchase of aircraft in bulk quantities. This will decrease the costs of acquiring the aircraft in a huge manner for the individual airline companies as they would collectively experience a large discount from the aircraft manufacturers.
There may also have benefits of managerial economies of scale as the group is likely to be led by some capable managers who could be costly for a small airlines company like Y-airlines.
To conclude, I must say that the Y-airlines must be enjoying the benefits of lower average costs due to lower marketing costs, operating costs, and a greater number of sales due to its ability to attract more passengers after joining the group. It may also make Y-airlines more capable of expanding its business and benefit further from purchasing economies of scale in the future.
Economies of Scale
Example - 2
Microeconomics - Economies of scale.
Level - IGCSE
Case study : American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of January 1, 2019, AIG companies employed 49,600 people. The company operates through three core businesses: General Insurance, Life & Retirement, and a standalone technology-enabled subsidiary. General Insurance includes Commercial, Personal Insurance, U.S. and International field operations. Life & Retirement includes Group Retirement, Individual Retirement, Life, and Institutional Markets.
(Source : https://en.wikipedia.org/wiki/American_International_Group)
Analyze why would AIG spread their businesses in various types of markets to grow big?
Possible answer -
As AIG has grown their businesses in more than 80 countries, so they must have become very large. Generally businesses grow large to enjoy the advantage of economies of scale by expanding their output or size of the business. This causes average cost to go down leading to higher profitability compared to the businesses which are smaller in size or have low production capacity as they focus on operating within a market or within a particular geographic region.
As AIG has grown large so they are likely to enjoy the benefit of low cost advantage. But interestingly, AIG has not expanded their capacity to sell one single product rather have diversified into various range of products such as General insurance, Life and retirement, standalone technology-enabled subsidiary. General insurance includes commercial, personal insurance, US and international field operations. Life and retirement includes group retirement, individual retirement, life and institutional markets etc.
As they are operating in various markets so they are likely to enjoy the benefit of lower cost, at the same time they would be able to avoid any risk as they are selling a range of products in different markets.
This is really a good idea to support the growth of a business for a longer period of time as this strategy may help AIG to overcome any financial issues if it arises at any point of time. This means if one market such as general insurance does not perform well and suffers due to low demand or severe competition then the revenue from the other markets such as life and retirement may help and support general insurance to sustain its business till it overcomes the bad time. This is possible as AIG can continue its other businesses as usual leading to be able to help financially to an unit that is performing badly for a period of time.
Therefore, AIG operating in various markets and offering a range of products would help it to finance new business units or can support an unit at a time when it is struggling to survive. This will help AIG to be able to continue their businesses for longer period of time regardless of one or two units of their not performing well in some markets.
In conclusion, by operating in various markets and offering a range of products AIG would be able to avoid any uncertainty or insecurity as it can spread the risk among various markets. This must be the reason why AIG has been operating their businesses in various markets by selling a range of products in those markets.
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