The following quotation appeared in a Wall Street Journal article on the battle

Question

The following quotation appeared in a Wall Street Journalarticle on the battle for market share in the automobile industry in 2000: "The huge fixed costs involved in developing new vehicles and running big auto factories means auto makers feel compelled to maintain, or expand, market share. Losing share long term could mean shutting down factories, or running factories at unprofitable rates." Do these statements support economic theory and show that economies of scale do not benefit a firm if the output level is small? Remember you have the benefit of seeing actions in this industry in the past 5 years... Be sure to explain your answer.

Explanation / Answer

Yes, these statements support economic theory. Economies of scale is achieved with higher production levels as the costs are minimized and the profits are maximized in higher production. If the minimum efficiency scale is quite large due to the high ratio of fixed costs to variable costs, only a few major players tend to dominate the space.

Minimum efficiency scale is the smallest amount of production a company can achieve while still taking full advantage of economies of scale with regards to supplies and costs.

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