Economies And diseconomies of scalein long run

DONE BY : MOHAMMED ASHRAF B.A 1ST YEAR MBA TOURISM DEPARTMENT OF TOURISM STUDIES PONDICHERRY UNIVERSITY

Economies and diseconomies of scale in long run

Economies of scale

Cost per unit decreases when quantity produced increases Economies of scale is a cost advantage that an enterprise obtain due to

expansion. It leads to the result in lower unit cost. Economies of scale occur when increased output leads to lower unit costs or

firm's marginal costs of production decrease Company A producing 100 units of ball, where cost per unit is Rs. 50. At the same

time, Company B producing 1000 units of ball, where cost per unit is Rs. 30. The diagram shows that as firms increase output from Q1 to Q2, average costs

fall from AC1 to AC2.

Diseconomies of scale

A firm sees an increase in marginal costs when output is increased when business organization become so big or inefficient

An overcrowding effect within an organization is often the leading cause of diseconomies of scale. This happens when a company grows too quickly, thinking that it can achieve economies of scale in early stage

The reason behind can be over production, less efficient employees, over crowd etc.

For example, you might think that adding some machineries to the factory will increase

the production, it will leads to appoint more employees to operate those machineries. In

this case, the output may increases , but cost per unit (Marginal cost)also gradually

increases.

Economies of Scale

The economies of Scale are classified as:

Internal Or Real Economies

External or Pecuniary Economies

Internal or Real Economies Internal economies are those which arise from the

expansion of the plant size of the firm. This means internal economies are exclusively available to the expanding firm.

Those Specifically related to the business or firm itself

1. Production2. Technical3. Marketing4. Financial5. Specialisation

External or Pecuniary Economies

External economies accrue to the expanding firms from the advantages arising outside the firm.

from the advantages arising outside the firm. External Economies follow to the large size firms in the form of discounts and concessions on,

Bulk purchase of raw material Large scale purchase of external Finance Massive Advertisement Campaigns Large Scale hiring of means of transport and warehouses

Diseconomies of Scale

The diseconomies of scale are two: Internal diseconomies of scale and

External diseconomies of scale

Internal Diseconomies Economic theory also predicts that a single firm may become less

efficient if it becomes too large. Like everything else, economies of scale have a limit too. This limit is

reached when the firm facing some negative factors.

Such as : Poor communication Coordination problem Low of motivation of employees Lack management Difficulty in team work

External Diseconomies External diseconomies are the advantages that arise

outside the firm Average cost eventually rise because of diseconomies of

scale For example, negative externalities like road congestion,

can impact the growth of an industry External factors beyond the control of a company