A clear explanation of key underpinning economic theories relevant to the EU. The Institution of the European Union and Theories Economies of Scale, Firms operating in the European Union can benefit economies of scale which is where a firm expands and lowers costs for consumers and makes profits. Official definition is cost advantage through increasing in sale, the main advantages of this are especially being in the EU are that firm has large market to sell to, there is increased demand and sales to be made and above all more scope for large firms. Large business such as
Boots can compete more effectively than a smaller business due to greater monopoly and lower unit costs which derive from economies of scale. e. g. a firm by entering the EU has access to larger market, larger potential of sales and increased output resulting in economies of scale. By increasing in size and producing more average costs are lowered and firm makes a profit. Supply & Demand The EU enables firms from member states to operate any where in the EU, there are advantages and disadvantages of this, Supply increases as there are so many firms operating so supplies increases but one can also have a disadvantage as there are so many firms operating supply has increased so prices would be lowered, in-order for firms to compete with each other.
Consumers will benefit from this is cheaper products and services but some firms might find it hard to compete with low prices, or compete with major firms. Supply and demand will definitely change as Larger market, increase number of consumers, increased sales and increased output. The diagram shows that as supply increases price lowers so consumers will benefit. Consumers in return will benefit from lower prices. International trade, (trading without barriers)
Free trade, the single European market benefits a firm and the economy of each member state, and the removal of trade barriers leads to reduction in business costs as well as in increasing competition and stimulating consumers and encouraging the creation of jobs and wealth. Today the single market is home to around 360 million consumers and a firm can make huge profits as of this. The single market also allows countries to specialise in domestic products, e. g. France is good at making cheese and wine so they specialise in these and sell to the rest of Europe, would.
This gives the French an advantage with its products and helps economic growth. Specialisation Some countries will benefit of this as they specialise in certain products or services. Countries can produce what they are best at this is also known as comparative advantage. E. g. France specialises in wine and cheese and many consider these products are of a better quality when they are produced in France. France takes advantage of this opportunity by producing what it is good at. In return results in production increases, benefit to the country, and could also benefit from economies of scale.
The single European market dose not implement the following trade barriers and by doing so trade is encouraged between member's states: (treaty of Rome) Quotas, These are limits in terms of quantity, on the amount of goods or services that one country will buy from another. This trading bloc has been removed in the single market and this makes the movement of large quantities of goods acceptable. Tariffs, These are taxes on imports of goods and services and this rises the price. By doing this the product or service becomes un-competitive as its costs are high. There is no tariff in the single market that encourages trade and lower prices.