Micro-Economic Theme Analysis

Running head: MICROECONOMICS 1

Student’s Name

Institutional Affiliation

MICROECONOMICS 2

“The Network Effect, Robotaxis and Tesla” published by Charles Morris (2017)

The Five Major Microeconomic Themes in the Article

i. Economies of Scale

Economy of scale is the strategic position that a given enterprise has over other

similar ones or firms in the same industry. The advantage is mostly in terms of the capacity

to produce goods and services. firms that have large capital and operational structure have

cost advantage in terms of distribution, marketing, and to some extent even in labor costs.

According to Morris (2017), a change in efficient technology results into some companies

being losers and gainers; yet even among the gainers, some are small gainers, while some

are big gainers. The extent to which a firm “gains or lose does not only depend on the

popularity of a company’s product, or event the quality, instead, it depends on the position

of the enterprise in the production chain”. As such, the authors explore the advantage that

Tesla has with the Autonomous Vehicles (AV) technology. The position that the company

holds in the production chain will determine how effective it will perform with respect to

the competitors. Most importantly however, with respect to Tesla Inc. is the capacity to

absorb the costs of production. The company proposes to provide all the supplies for the

entire production process by itself; that is ranging from the hardware to the software. If this

strategy is cost effective for the company, then it will enjoy economies of scale over other

taxi companies that would only need the software to change into the AV system. The

challenge faced by other taxi companies is the compatibility of the current vehicles with

the proposed technology. In the event that an entirely new vehicle is necessary, then Tesla

Inc would certainly have an economic advantage over other companies.

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ii. Competition

In order for enterprises to survive, especially in a competitive market, firms need

to stay ahead of other enterprises producing similar products and services. Competition is

influenced by several factors, but firms with large economies of scale as stated above have

an edge over others with less economies of scale. Large economies of scale enables a firm

to absorb the extra cost that comes with enhancing technology, at the same time, provide

the product or service to the market. According to the argument by Morris (2017), a

company’s position in the market chain is indeed an important factor. Since Tesla is most

likely to be the first of its kind in terms of AV technology, it is prudent that it position itself

on top of the production chain, since competition is expected from other companies;

“Toyota, Nissan, and Honda have all promised self-driving cars by 2020”

iii. Diminishing returns

According to Morris (2017), “when new technology is established, there are

winners and losers”. What therefore, causes the winning in particular? The paper suggests

diminishing returns as the main explanation. Diminishing return in economics is the point

at which an increase in the inputs in a production process results into an increase in

marginal output up to a point where the marginal output increases at a decreasing rate. At

this point, the production possibilities of the combination of production inputs are

exhausted. In order to go beyond this limit, only enhancement of production efficiency is

necessary. The graph presented below show the diminishing return in a production process.

According to the figure below, the first phase of the curve which is characterized by rising

curve is the production phase where increase in input results to the increase in marginal

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output at an increasing rate. The marginal output increases with additional units of input

up to a point where the curve starts to level. The level point is referred to as the optimum

production point. Any increase of input beyond this point results into increase in marginal

output at a decreasing rate as indicated by the downward sloping part of the curve in figure

1 below.

Input B

Input A

Figure 1

Technology offers the best possible solution through which the optimum

production limit can be expanded further. In order to further understand this aspect, it is

important to explore the production possibility frontier

iv. Production possibilities/frontiers

Production possibility frontier refers to the different combination of output levels

that result from different combination of input levels. At this level, regardless of the

variation in the combination of input, the resulting output cannot exceed s specific limit.

Assume that currently, the given combination of various production inputs by Tesla Inc

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results into production of a given quantity of output, regardless of the combination structure

of the inputs; as shown in figure two below

Input B production frontier

Input A

Figure 2

According to the figure above, increase in input of the production process results

into an increase in output. This however is different from diminishing returns concept.

Production possibility frontiers are essentially a combination of various inputs with respect

to the production capacities. As shown in the figure 2, the production frontier cannot be

pushed beyond the limits depicted in the curve, regardless of how the inputs are combined.

The only way to push the production frontier outwards is through increasing the efficiency

of the production inputs; such that a similar combination results into more output than

before, as shown in figure 3 below

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Input B

Input A

Tesla Inc is likely to experience an output increase, in terms of profitability when it finally

introduces the AV vehicle. The production frontier of Tesla may even be further outwards

given the fact that it is self-sufficient in almost every chain of production.

v. Products complimentary

Product compatibility refers to the requirement of another product in order for a

particular product to function. For example, smart phones cannot work without the

operating system and other applications that support other functions of the phone. This is

an aspect with which Tesla is likely to use in order to dominate the market. Tesla proposes

to develop its own cars, with the autonomous driver technology as the main focus of the

design. It is also currently collecting the relevant traffic and road information data that

informs the design. Morris (2017) suggests that since Tesla is most likely to be the pioneer

of the AV system, it may acquire the rights of traffic information necessary for the

operation of the technology. Other rival companies such as Honda, Nissan, and Toyota are

likely to buy the rights from Tesla instead of developing their own database, which is most

likely to be cost effective. Tesla has effectively maneuvered the challenge of product

complimentary, by providing all the necessary hardwares and software by itself.

Increase output with the same

input combination after

technology adoption

MICROECONOMICS 7

Reference

Morris Charles (2017). The Network Effects, Robotaxis, & Tesla. Retrieved September 10, 2017.

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