8. Now assume that Menacing Faces is a perfect competitor. At what price and out

Question

8. Now assume that Menacing Faces is a perfect competitor. At what price and output will Betty Joe be indifferent between the small and the mid-sized factory? At what price and output will she be indifferent between the mid-sized and the large factory? If she builds the mid-sized or large plant, what will happen in the long run?

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Explanation / Answer

Problems of Small Scale Industries

by Gregory Hamel, Demand Media

Small businesses have certain advantages over large-scale industries such as the ability in many cases to form close relationships with customers and clients, but small-scale operations also face several notable disadvantages. Small businesses often focus on a niche or specialty that differentiates their goods or services from larger competitors.

Economies of Scale

Economies of scale is a concept in economics that describes a situation where the marginal cost of making a certain product falls as a company makes more of the product. In other words, when economies of scale exist, the cost of producing a certain product is lower per unit if the product is produced in large quantities. For example, the cost per unit of making cars might be lower for a manufacturer that produces 100 cars a day than a manufacturer that produces one or two cars a day. Large-scale operations allow manufacturers to employ systems such as assembly lines that can increase productivity and reduce costs. Small businesses may have difficulty competing with large businesses that are able to mass produce products inexpensively.

Financing

Another problem that small-scale business operations face is that they may have more difficulty getting financing than larger businesses. For example, the owner of a small pizza shop might have difficulty getting a loan to open a second location, while a nationwide pizza chain would likely have little difficulty getting a loan to new location due to having more cash and assets.

Related Reading: Challenges Affecting the Management of Small-Scale Dairy Industries

Laws and Regulations

According to the U.S. Small Business Administration, small businesses are subject to the same laws and regulations that affect large corporations. This means that small-business owners must be aware of and comply with such regulations. This can divert time and energy from other businesses activities. Large businesses may have the resources to hire legal staff to deal with legal issues, allowing managers to focus on running the business.

Advertising

Consumers can only buy products and services if they are aware of their existence and where to buy them. Small-scale industries may have difficulty reaching a large number of consumers through advertisement due to limited marketing budgets. For example, a small company might only have the means to pay for a few advertisements in local newspapers, while a large company could pay for television commercials, billboard ads and online advertisements.

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