Question

Wal-Mart and General Motors are two very large companies. Describe and define the economies and dis-economies of scale for both companies in relation to the resources they use in their factors of production (Land, Labor, Entrepreneurial Talent, Capital).

Answer 1

Economies of scale refers to the cost advantage enjoyed by a firm , the marginal cost or cost per unit of output decreasing with increasing scale of production . On the other hand diseconomies of scale is the situation when there is an increase in marginal costs when output is increased .

Wal Mart is retail chain of hypermarkets which caters to huge numbers of customers . Distribution the fixed costs over large number of output would result in economies of scale . Since Walmart is a retail store , it needs to conduct some market research to find out the culture and economy of a particular area . For example, the hypermarket in India is better to offer the infrastructure carrying traffic to their locations and offer better customer service . And in Japan the placement of hypermarkets in malls which include entertainment venues will be more attractive to customers , this can raise economies of scale . To take advantage of economies of scale the factors of production should be utilized accordingly .

Next we come to General Motors , which designs, manufactures, markets, and distributes vehicles and vehicle parts, and sells financial services . So in this company the judicious usage of capital and entrepreneurial talent is of utmost importance . Innovation in vehicle industry and proficient usage of capital can lead to profits higher than marginal costs incurred . More land included in production can lead to diseconomies of scale if not used for increase in production . Here degree of specialization of labour in vehicle manufacturing and selling of financial services ensure economies of scale .