Question 1-Why would a firm experience economy of scale?
Economies of scale are achieved when more units of services or goods are produced on a much larger scale with lower input cost as compared to a small-scale industry where the input costs are much higher. Economies of scale have low input cost and maximize the returns for the producer. When a small scale company expands and grows, the production of goods also increases due to the supply and demand; the company then has the benefit of decreasing the input costs as it produces more goods for a lower cost than compared to it would’ve cost on a smaller scale. Economic growth occurs when economies of scale are achieved, as the entire society gets to provide their skills and maximize people get to enjoy those goods. There are two types of Economies of scale, external and internal (Carlino, 2012).
Adam Smith, who is known as the father of economics and the father of capitalism advocated the division of labor and specialization so that maximum returns could be achieved in production. He was of the thought that if there’s division among the labors, then each laborer could benefit the enterprise in whichever skill he specialized in. Smith argued that because of the division the employees could easily do a specific task with efficiency due to the skills they possessed which in return would produce excellent results. He suggested that it would improve their ability to do work and each task would be finished faster than before. Which is why economies of scale could create plenty of goods in a short period with relatively low input cost. (Carlino, 2012)
In Economics there are two types of economies of scale, internal and external economies of scale. Alfred Marshall, a renowned economist, created the ideas of the two types of economies of scale. Internal economy of scale is obtained when an enterprise lowers the cost and produces more goods than usual, which benefits not only the enterprise but also the consumer. An external economy occurs outside a specific firm but within the same industry. External economies of scale benefit everyone that works within an industry, for example, a local coal mine system, as it would have a lower transportation cost.
Another example of an external economy of scale is a fast-food chain in the same location, as the chain of supply and transportation would cost less, same way more industries would begin to provide support to those fast-food chains in the location by creating breeding farms, potato farms and other items that benefit the fast food chains. Economies of scale eventually help everyone use their specialized skills in producing goods in the industry at lower input costs which then helps the economy prosper.
Question 2-Elaborate these two sources of power for a monopoly using Malaysian examples.
In the world of economics, a monopoly can be characterized by an individual seller or firm that is only producing one kind of goods that nobody else is. A monopolist produces goods that cannot be replaced by the competitor as he would be selling the best version of it. The selling firm does not have to face competition in the market as there are no other companies competing with it, and even if they are they don’t have the advantage of being the best.
A true monopoly can be achieved when a monopolist controls almost 25% of the specific market, making it harder for other competitors to compete with the firm. A monopolist can set his own prices and charge as much as he pleases because there is no competition in the market. The monopolist that owns a certain market would be providing a product 100 times better than the competition in the same market. (Jomo, 2016).
The U.S does not have many true monopolies due to there being legal barriers that keep the monopolists from ruling the market, but still a close example of a Monopoly in the U.S is Microsoft and Google as both these companies dominate their markets due to which they earn a higher profit and reputation. In a business-related monopoly market, the seller would register his patent through a government license, ownership of resources, copyrights, etc. which would make him the owner of those produced goods which would restrict other sellers in the same industry.
The monopolist then enjoys complete freedom in the market and can set the price according to his rules, and the company eventually gains maximum profit. The company, even if it sets the highest price, could sell its products to the consumers as there won’t be a replacement in the market. That is how a monopolist rules the market. A monopoly firm is just like a competitive firm, but a monopoly maximizes profit by producing goods that have equal marginal revenue and cost.
One example of a monopoly in Malaysia is TNB, the Tenaga National Berhad, which is a company in Malaysia that is publicly listed. TNB rules the electricity market in Malaysia. TNB deals with communication like electricity generation and distribution in Malaysia. As the government’s privatization policy took place, the national electricity board was configured during the 1990s. It was in 1996 that TNB was internally restricted due to the there being developed in many secondary firms. It wasn’t long after that TNB was charged with the task of production of a firm, then the distribution and communication section got hold of TNB communications on a personal level. Government grants an enterprise a monopoly status. One of the biggest examples in the Malay region is the Post Malaysia Berhad, which got its monopoly status in the Straits settlement in the 1800s through the formation of postal services; it slowly expanded to the entire Malay region during the 20th century. (Lucas & Verry, 2016).
Another example of a monopoly is a legal monopoly that lets the monopolist patent his product. Patents are issued by the government for a period of twenty years. And during that period, any other firm or enterprise cannot copy or remake that design. Patents give enough time for the firm to recover and obtain the large cost of research, development, and technology. One of the major examples of a legal monopoly in Malaysia surrounding a location is a Casino in Genting Highlands, which kept exclusive possession and ownership of a casino in the entire region without there being any competition. The casino enjoyed legal freedom in that location due to legal monopoly, so it is one example of a monopolistic firm in Malaysia. Keeping in mind the location of the casino and government restrictions put on the Casino it is a perfect example of a monopolistic enterprise.
Monopoly, which could be natural, the result of market failure or government restriction, is disliked because in monopoly, resources cannot be allocated optimally. This is a major issue, as economics is entirely about the optimal allocation of scarce resources. However, in some cases, monopoly is desired. For instance, only states must have a monopoly over violence. In addition, only states must have the monopoly to develop nuclear weapons.
It is also a fact that monopolies are becoming a rarity because of technology and the availability of capital. It is essential that a government must not allow a monopoly to be established in those industries which produce essential and normal goods and services.
References
Carlino, G. A. (2012). Economies of scale in manufacturing location: Theory and measure (12 ed.). Springer Science & Business Media.
Jomo, K. S. (2016). Growth and Structural Change in the Malaysian Economy. Springer.
Lucas, R. E., & Verry, D. (2016). Restructuring the Malaysian Economy: Development and Human Resources. Springer.
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