Boosting Capital

Economies of scale invariably benefit firms. This occurs when "total costs rise less than proportionally to production increases" (Piana, 2003, p. 3). In other words, as more labor joins the organization, production grows at a rate that exceeds the originally calculated unit of labor. For example, a manager of a Valvoline franchise could bring on three employees for an afternoon shift to process the vehicle needs of twelve customers. If, however, the manager opted to bring on five employees for the same shift, they would be able to assist more customers within the same amount of time, perhaps processing as many as thirty vehicles. By more than doubling per unit output with a net increase of two units of labor, greater efficiency may be achieved.

Potential disadvantages as part of a large corporation exist. They may struggle with adapting to the shifting demands of the client as defined in company policy. With a longer chain of command, communication issues can arise. If leaders sense an opportunity for growth in its market, it will take a longer time for the large corporation to shift to this new objective. In addition, large corporations will face more paperwork related to taxes. Although they may earn more revenue, disadvantages remain certain.

If the business is booming at Valvoline Instant Oil Change and the day supervisor suggests simply hiring more workers rather than boosting capital, I would ask him or her to explain on what grounds they feel such a decision is necessary. The addition of labor should only come about after a consideration of the cost of each worker and the marginal revenue product (calculated by multiplying the price of output by the marginal product of labor). In the case that there is a large demand and workers are struggling to keep up with timely processing in spite of accurate capital resources, additional labor would make sense. Otherwise, an investment in boosting capital may better serve company needs.

References

Piana, V. (2003, January 1). Costs: A key concept in economics. Economics Web Institute. Retrieved from http://www.economicswebinstitute.org/glossary/costs.htm

Bouman, J. (1994). Essential Principles of Microeconomics. Upper Saddle River, NJ: Pearson Custom Publications.