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Analysis of Economics

Autor:   •  April 13, 2011  •  Essay  •  387 Words (2 Pages)  •  1,362 Views

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According to Wikipedia, economies of scale refer to the cost advantages that a business obtains due to expansion (Wikipedia). Our Managerial Economics book states that when the average cost falls significantly with increase in scale, a new firm must enter the market with a large market share to be competitive. If this addition to industry output requires significant drop in market price, entry will be unprofitable. (Samuelson & Mark 301) In order for a company to perform well within the market it has to be a competitive advantage. Competitive advantage is the strategic advantage one business entity has over its rival entities within its competitive industry. With that being said, yes, economies of scale have relevance to such companies as Walmart. When a company can buy in bulks they can take advantage of discounts. For example, walmart can buy DVD from a supplier for $5.00, while it cost one of Walmart smaller competitors $6. It also cost Walmart $4 to distribute the DVD and pay the overhead cost of the stores, while it cost the smaller competitors $5 to do the same. Walmart can sell the DVD $9.50, and still make a $0.50 profit. The smaller competitor can't charge that little, because at a cost of $11 per DVD,it would be losing money.

According to the article written by Julio Viskovich he states, "As such a large firm, Wal-Mart has achieved economies of scale. Considered a retail giant and industry leader, the firm controls much of the market. Because Wal-Mart is so big and has so many locations, unit costs have declined and any firms hoping to enter the market must do so at a large scale. This makes is very difficult, if not impossible for new entrants. Wal-Mart's scale requires any competing firms to have plenty of capital as they will face plenty of sunk costs. The company's large ad campaigns put pressure on competing firms to try and match those expenditures in order to appear competitive (Boyes, 2004). Though

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