Need help with question from my econ class?

Question

What factor in the "real world" can account for multi-plant economies of scale? This is a discussion question in my econ class that I need to answer and I'm a little unsure. I would think transportation costs are a factor but I think everyone is going to say that. Is there other factors (besides mergers) that could account for multi-plant economies of scale?

Answer 1

You have identified one of the big issues -- transport of raw materials to the plant, and of finished materials to market. We'll ship wheat massive distances, but prefer bottling to be close to the market, given it's weight to value ratio (who's going to ship a $.75 can of pop 1,000 miles? The question is really a bit loaded, since "economies of scale" have traditionally been used to justify one location, one massive operation. One of the best examples mkight be found in power companies, which typically have plants (hydro, coal, gas, oil and nuclear) spread about based on resources, transmission costs and what the locale will permit politically (think NIMBY).

Other issues include the availability of skilled labour and management within a single market. Employees today are also influencing plant locations through "life-style" choices -- the professionals you need might prefer to live in Oregon or Arizona. If there are enough like that, it could influence management decisions.

Sometimes, as well, multi-plant decisions might be based on politics. To get a large Air Force contract requiring Senate support, Boeing might well decide to have components built all over the country to gain political support. Why does the Army have so many bases? It might be arguable that one or two would be more economic, but the, support from politicans making financial decisions might well decrease.

Hope this has given you a few other avenues to consider.