ECONOMICS AND INTERNATIONAL MARKETING

Economics and International Marketing

Economics and International Marketing

Economic

Economics of scale

Economies of scale refer to the reductions in cost that firms achieve by producing in larger rather than smaller volumes of output. “Economies” in the context refers to the benefits incurred by reducing costs, largely by spreading fixed costs over a greater quantity of output.

Economies of scale tend to favour the formation of larger firms and hence relatively oligopolistic market structures (those dominated by a few giant companies). Large firms generally pay much less for material inputs than do small firms because they buy in bulk and often enjoy economies of scale in transportation as well as in the production process. The presence of economies of scale varies widely among firms and industries. It is indisputable in sectors such as industrial agriculture and capital-intensive forms of manufacturing, such as steel and automobiles. The degree to which services, with intangible outputs, enjoy economies of scale is less clear. (Stutz, 2010)

Economic scale is closely intertwined with geographic location. Indeed, the choice of location cannot be considered in isolation from scale and production technique. Different scales of operation may require different locations to give access to markets of different sizes. Conversely, location itself can influence the combination of inputs and, hence, the technique adopted. Economies of scale tend to favour a select group of geographic locations over dispersed production patterns.

Price elasticity of demand

If a price decrease generates a relatively small increase in quantity demanded, the percentage change in quantity divided by the percentage change in price will be greater than -1 or less than 1 in absolute value. A price decrease leads to a fall in the product “P•Q” or total revenue. Conversely, if a price increase leads to a relatively small decrease in quantity demanded; total revenue will rise with a rise in price. In this case, the price elasticity is greater than -1 or less than 1 in absolute value. If the demand curve is price inelastic, price and total revenue move in the same direction. (Friedman, 1962)

When the demand curve has unitary elasticity, the percentage rise in quantity, equals the percentage fall in price. The rise in quantity just offsets the fall in price, leaving total revenue unchanged with unitary price elasticity of demand. Because price elasticity of demand determines the change in total revenue resulting from a price decrease/quantity increase, price elasticity also determines the marginal revenue due to a price/quantity change. Marginal revenue (MR) is defined, as the change in total revenue resulting from a small change in quantity: If the demand curve is elastic for a given price change, total revenue rises with a fall in price and a corresponding rise in quantity. Both numerator and denominator of marginal revenue are positive, and hence marginal revenue is greater than zero.

If the demand curve is inelastic for a given price change, total revenue falls with a fall in price and a corresponding rise in quantity. The change in total revenue is negative, when the change in ...