economies of scale final

ECONOMIES OF SCALE

Content Outline

Definition of Economies of Scale.Economies of Scale.

Internal Economies of Scale. External Economies of Scale

External Economies of Scale.Diseconomies of Scale.

Internal Diseconomies. External Diseconomies.

Definition of Economies of Scale“Economies” means advantages and “Scale”

refers to the size of unit. When the producer starts producing on a large scale in the long run he starts getting some economies as well as some diseconomies of scale.

The scale of production means the size of the production of a firm. The scale of production can vary from small to large depending upon the quantity of output per unit of time of the firm.

An important feature of production in the modern industrial economy in that production takes place on a large scale. This leads to reduction in the cost of production. The low cost is a result of what is called “ECONOMIES OF SCALE”.

Concept of Economies of Scale

The concept of “ECONOMIES OF SCALE” can be understood in two senses:-Broad Concept.Narrow Concept.

Broad Concept: Anything which services to minimize average cost of production in the long run as the scale of output increases is referred to as “ECONOMIES OF SCALE”.

Narrow Concept: “ECONOMIES OF SCALE” refers to the characteristics of the production process by which average productivity is enhanced with the expanding scale of output.

Classification of Economies of Scale

The “ECONOMIES OF SCALE” can be classified as:Internal Economies of Scale.External Economies of Scale.

Internal Economies of Scale

Internal economies are those advantages which are enjoyed by individual firm when its size expands. They depend primarily on the size of a firm. These are enjoyed by individual firm when its scale of production increases, independently of the action of other firms.

Types of Internal Economies of Scale:1. Labour Economies.2. Managerial Economies.3. Marketing of Economies.4. Financial Economies.5. Technical Economies.6. Risk-Bearing Economies.

LABOUR As scale of production expands

division of labour possible. With the division od labour

specialization of the labour improves

Managerial economics In a large firm every department

such as marketing, finance, administration etc have professional managers.

This increases the operation efficiency and reduces the cost.

marketing A large firm enjoys economies in

purchasing few raw materials and selling its finish products.

It has better bargaining power and hence it can purchase raw materials in bulk and can get discount over it.

Financial

A large firm can get finance easily. Large firms have better

creditability. Large firms are considered less

risky by banks and financial institution.

technical A large firm can minimize the cost

of manufacturing of the product by getting improved machinery and technology.

Large firm can it economical to produce or manufacture parts or components rather than buying them from other sources.

Risk bearing A large firm can minimize the risk

of business. The diversification of products,

diversification of markets, diversification of methods of production etc.

External Economies of Scale.

External Economies means the benefits accruing to all the firms in an industry from the growth of that industry. External economies are enjoyed by all the firms in the industry, irrespective of their size. External economies arise when the industry is localized in a particular area all the advantages of localization are enjoyed by the firms in that industry.

Types of External Economies of Scale:1. Economies of Localization.2. Economies of Information.3. Economies of By-Products.4. Development of Transportation and Marketing

Facilities.

Economies of Localization.

When economies of firm are located in a single area they get the benefit of cheap power raw materials, transport, banking, research facilities etc.

All these advantages help to reduce the cost of production.

Economies of Information.

In a large industry research work is done jointly.

Market information becomes more readily available to all the firms growing in the industry.

Economies of By-Products.

In a large industry wastage can be reused to produce by products.

The firms will get some extra income and this will lead to lessening in cost of production.

Development of Transportation and Marketing Facilities.

Expansion of industry may make possible to the development of transportation and marketing facilities.

That reduces the cost of production.

Diseconomies of Scale.

When the firm expands beyond a certain limit, it leads to higher cost per unit. A rise is cost due to larger output is called “DISECOOMIES OF SCALE”

The following are two types of diseconomies of scale:Internal Diseconomies.External Diseconomies.

Internal Diseconomies

Internal diseconomies refer to the disadvantages experienced by the firm. This enables the firm to produce less efficiently at the same levels of output. Such disadvantages arises from with in the firm s such as:1. Technical Diseconomies.2. Risk Taking.3. Administrative Diseconomies.4. Managerial Diseconomies 5. Labour Diseconomies.

Technical Diseconomies.

If production is increased beyond the optimum point diseconomies arise.

So it leads to high cost of maintenance and heavy losses in case of break down.

Risk taking Large firms are exposed to risk

than the smaller firms due to large scale of operations.

In large firms strike, lockout, layoff are more.

Administrative Diseconomies.

Administrative becomes very difficult when an organization becomes very large.

There emerge difficulties of coordination, designs making etc.

Managerial Diseconomies

When the scale of production becomes very large, supervision and management become very difficult.

Labor Diseconomies. When the number of labours

become very large it causes less contact between the labour and management.

This results in labour unrest, industrial disputes, and misunderstanding between labour and management.

External Diseconomies

As an industry expands, external diseconomies arise due to increase in factor price. External diseconomies refer to the disadvantages experienced by the firm and industry to external factors such as:1. Intense competition among the firms raises the

price of raw material and the factor of production.2. When many firms are located in a particular area,

there will be considerable pressure on transport system.

3. Expansion of an industry in a particular area will lead to higher rent and high cost.

4. Management and co-ordination becomes difficult.5. Scarcity of electricity, water, finance, technical

labour raises the price.Pollution of rivers and lakes creates external diseconomies.

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