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Scale and Scope of Firms and Neoclassical Theory

Introduction

This paper aims to assess the strengths and weaknesses of the technological approach embodied in neoclassical production function and also explain the scale and scope of firms. Previous literature of economics reveals that corporate management has been engaged in cost reduction, improved efficiency, and downsizing, neoclassical theory of firm and production proposes that firms are determined to have only maximum profit but also want to gain maximum market share (Stratopoulos et al, 2000). In relation to the essay topic scale and scope of the firms are taken into account to discuss the neoclassical firms and production function.

Scale and Scope of Firm and Profit Maximization

The scale and scope of firms are evaluated with the understanding of economies of scale. Firms are intended to earn large profit on account of significance of economies of scale. The output of firms is described to show economies of scale which is over some range of output and if amount of firms’ output increase in long run the average cost falls. Even though a smaller firm has higher costs than the larger firms it is on account of economies scale and higher costs of smaller firms makes it difficult for smaller firms to compete with larger firms. The general reasons of scale of firms are related to economies of scale because input size of smallest economy both physical and human capital is large and the cost for set up is also large that is fixed cost. However, it is considered as long run case but such cost can be increased but not decreased.  Large size inputs are more productive than small size inputs with the condition to be operated at capacity. In some cases productivity is greater on account of physical principles such as volume of containers can increase more than in proportion because its area is increased. Specialization of firms increase with the size and large firms find them more competent as they have opportunity of gaining specializations like comparative advantage and learning from experiment. The advantage for large firms is that they have bigger producer and bigger producers have potential to purchase more inputs and getting discounts on the products.   The implication of firms’ scale can be evaluated because firms existed to maintain market share for instance if a firm sells the products more than its competitors in the market it will have higher costs due to the economies of scale and it will have to charge high cost to compensate other charges. Consequently firm has competitive disadvantage.  In order to create competitive advantage environment it needs to release other such offers that assist in getting more market share. Thus, firms are concerned about the market share and are consistent with the oligopoly industry as with the oligopoly industry firms have to be more concerned about other strategic and price cuts are used by firms to force smaller firms doing what the larger firms want. However, larger firms do not force the smaller firms as Government can interfere into the matter penalize them. To increase the scale of economies firms merge or expand which increases probability of bigger customer base. When firm’s scale increases it becomes global and begins to provide global services or larger markets are economically viable as a result of cost reduction as main barriers to investment or sales by foreigners within the country or the drop in the cost of transportation and communication and firms may split or reduce their size if things occur against it.  In the neoclassical theory of the firm the marginal cost curve and the average cost curve are distinctively in U-shaped. Neoclassical theory of firm affects the scale of firms by providing short run output level. The production time is divided into three period classes by the neoclassical theory: the market period is the period when output cannot be changed and; the short run is the time when all production factors are available.  Thus the supply curve becomes vertical in the short run and the product already produced can be sold.   

 

The scope of the firms are concerned with the production and if the cost of a firm producing different products is less than costs of the outputs produced separately by two or more than two firms so C(Q1,Q2)< C1(Q1)+C2(Q2).  Firms’ scope is also evaluated with joint use of production facilities and outputs. The reason why scope of economics affects the firms is that joint production, and joint, marketing appeared as to facilitate the production output. Joint production is likely to facilitate for reducing the production cost. Joint marketing and joint administration, on the other hand, can lower the cost of advertisement by simultaneously advertise the products rather than advertising all products separately.  Firms can increase the products with growing scope of economies and drop it when scope decreases. It can be explained that with the inception of internet the firm’s cost for sharing information with customers the sharing such information can be greatly useful for firms.  When firms offer more than one products as customers demand to have one stop facility for investing, or insurance, thus firms are more likely to have more customers and can have advantage of economies of scale by selling more than one type of products. Firms are able to offer more than one products when production cost is lower with the multiple products and multiple products increase the demand and production output.  According to neoclassical theory of firms, the minimum cost of production function is caused by process of profit maximization. To Stratopoulos (2000), the minimum cost functions assumes that for a given state of technology as embedded in an fundamental production function, and vector of factor prices, the minimum cost for any given level of output may be described as a function of the output level and factor input prices.

Conclusion

This essay analyzed the scale and scope of firms in relation to neoclassical theory which emphasized that firms are earn maximum market share rather than only focusing on the profit. The main concern of the neoclassical theory is that measurement of the relationship between input and output cannot be fixed as input technology keeps changing with the passing time. The production function of neoclassical theory firm, apart from the questions about existence of firms, boundaries between firms and market and organization of the different governance body of firms and heterogeneity of firms, controls the transformation of inputs into outputs and products. However, the neoclassical theory proposes to earn the maximum profit by controlling the firms’ inputs and outputs, it largely impacts the scale and scope of economies. Firms intend to increase their profit by maximizing the production method that affects the cost of average production and range of output will be increased by the range of inputs that also decreases the cost output.


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