Global Financial Inequality

  • October 25, 2020

Henry Ford capitalized on this and other internal economies of scale when he created the first modern automobile assembly line in the early 20th century. Specialization continues to drive productivity increases in the modern age. Internal economies of scale can happen across multiple areas of business operations. Internal economies of scale, on the other hand, apply to an individual business. An increase in the overall size of operation – more staff, more facilities, more equipment and larger purchasing orders – can, under the right circumstances, lead to lower per-unit production costs. The concept of economies of scale offers a good explanation of why consumers can expect to find lower prices at big-box stores, like IKEA and Walmart, than they might at a small neighborhood outlet.

Birth rates equal death rates, and production rates equal depreciation rates. Minimizing waste allows for a steady state economy at higher levels of production and consumption. Consumption is inelastic, so the consumer will consume the same quantity no matter the price. The producer will be able to produce the same amount of the good, but will be able to increase the price by the amount of the tax. Tax incidence is the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it.

Taking a closer look at Airbnb, one of the key players in the sharing economy, helps define the boundaries of this model. When a condo owner temporarily rents out his property through Airbnb while he is out of town, the living space is truly shared. However, if the owner permanently lives in a different home and continuously rents out his condo, he is essentially just operating a rental property. The advantages of division of labor are not limited to the assembly line, however. Adam Smith, the patriarch of modern capitalism, described the benefits of the division of labor in his classic work, The Wealth of Nations. Having workers specialize in a particular task typically allows for greater productivity than when workers are asked to do many different tasks to bring a product to market.

However, the unit cost of producing each item falls as you discover increasing economies of scale. The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems – the problems of life and of human relations, of creation and behavior and religion. A steady state economy entails stabilized population and per capita consumption.

Economy Examples

The larger operations can put goods on the shelf at lower overall costs due to economies of scale. Internal economies of scale arise when the cost of producing an item that your business sells decreases as the size of your business expands. That is, as a company grows larger and larger, overall expenses are bound to increase.

The burden of the tax is not dependent on whether the state collects the revenue from the producer or consumer, but on the price elasticity of supply and the price elasticity of demand. To understand how elasticities influence tax incidence, its important to consider the two extreme scenarios and how the tax burden is distributed between the two parties. Tax incidence is the analysis of the effect a particular tax has on the two parties of a transaction; the producer that makes the good and the consumer that buys it. Tax incidence falls mostly upon the group that responds least to price, or has the most inelastic price-quantity curve. An excise tax is typically heavier than an ad valorem, accounting for a higher fraction of a product’s retail price. It should also allocate the costs of public services to be able to those who use that, although that principle is usually hard to execute inside practice.