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.

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.

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.

Administrative Diseconomies.

Administrative becomes very difficult when an organization becomes very large. There emerge difficulties of coordination, designs making etc.

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".

LABOUR

As scale of production expands division of labour possible. With the division od labour specialization of the labour improves

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.

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.

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.

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.

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.

Technical Diseconomies. Risk Taking. Administrative Diseconomies. Managerial Diseconomies Labour Diseconomies.

Such disadvantages arises from with in the firm s such as: (internal diseconomies)

Internal Economies of Scale. External Economies of Scale.

The "ECONOMIES OF SCALE" can be classified as:

Broad Concept. Narrow Concept.

The concept of "ECONOMIES OF SCALE" can be understood in two senses:-

Internal Diseconomies. External Diseconomies.

The following are two types of diseconomies of scale:

Labour Economies. Managerial Economies. Marketing of Economies. Financial Economies. Technical Economies. Risk-Bearing Economies.

Types of Internal Economies of Scale:

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.

DISECOOMIES 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

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.

Managerial Diseconomies

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

External Economies

means the benefits accruing to all the firms in an industry from the growth of that industry.

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: