1.

Define internal economies of scale

Internal economies of scale arise because of the growth in the scale of production within a
firm and a fall in the long-run average costs. JD.com can be identified as having strong
internal economies of scale due to their expertise of ecommerce and their highly efficient
centralised warehouse system.

2. Explain the difference between fixed costs and variable costs using online retailer
JD.com as an example.

Fixed costs are costs which do not vary as the level of production increases or decreases,
whereas variable costs are costs which vary directly in proportion to the level of output.
JD.com has a new warehouse in Shanghai China which is completely automated, with only
four employees. With labour costs so low and assuming the costs of electricity to run the
automated warehouse costs are constant, JD.com’s costs of production are likely fixed as
the cost of labour and paying for electricity will stay the same even if the warehouse is not
functioning at full capacity. If the warehouses were not centralised in Shanghai and were
instead scattered throughout China and unautomated, the costs of production would likely be
variable as more labour would be required and the company would need far more delivery
drivers to go between the warehouses and more workers in the warehouses to make up for
the lack of automation, overall reducing efficiency and increasing labour costs and
production costs. (nah ignore this)

Fixed costs are costs which do not vary as the level of production increases or decreases,
whereas variable costs are costs which vary directly in proportion to the level of output. JD
warehouses are fixed costs because the cost of production does not vary depending on the
value of the goods. A variable cost for JD would be the cost of deliveries according to how
much goods they deliver.

3. Analyse two possible internal economies of scale that JD.com might experience after
its alliance with google. Illustrate your answer with a diagram.

Internal economies of scale occur when a firm grows its scale of production while average
costs of production decrease in the long-run. JD may experience an internal economy of
scale due to increased sharing of knowledge. Google offers its large database of customers
therefore JD will be more accommodating to customer needs and the nature of the market,
for example whether a certain item of clothing is popular and what sizes they should stock
more of. JD will also experience an internal economy of scale because they will become
more internationally competitive due to Google's presence in international markets, giving
them knowledge of markets where they would likely gain more profit rather than competing
against the Alibaba monopoly on the Chinese ecommerce market.

(Talk about) Financial, Marketing, Technical, Managerial

 Higher costs and lower
production

AC
Higher production and
lower costs

BC

AO BO

Economy of scale

4. Discuss whether JD,con will definitely have lower average costs if it uses an
automated and centralised warehouse distribution model for its online retail business.

For JD to achieve an economy of scale, it has to reduce its average costs as it’s output
increases. The way JD can do this is through creating an internal economy of scale through
the investment in more efficient production and delivery, such as their new centralised
warehouse distribution model. This model intends to increase efficiency through decreasing
the length of supply chains and beaurocracy by focusing all stock
AI Delivery Systems
Labour costs
Counterpoint maintenance costs
High costs for the warehouse equipment
Centralised transportation
Efficiency
Costs still high due to same day deliveries