Economies and Diseconomies of Scale

Economies and Diseconomies of scale

• Those advantages or disadvantages that accrue to a firm from within, due to its scale of operation are referred to as Internal economies and diseconomies
• Those advantages or disadvantages which come to the firm from outside and are experienced by the industry as a whole mainly due to localization are referred to as External economies and diseconomies .

The average cost of production is  favorably  affected when a firm starts enjoying economies, whereas the average cost begins to rise when the firms experience diseconomies as shown in following figure:

Economies of scale

Economies of scale are those benefits which a firm gets due to its own expansion or due to expansion of other firms.

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These are of Two types

• Internal Economies of Scale.
• External Economies Of Scale

Internal Economies of Scale

• Internal Economies are those advantages which a firm enjoys from within itself by way of reduction in its average cost of production as its scale of operation expands. Internal Economies are firm Specific these are not shared by other firms.

Types of Internal Economies of Scale

• Technical Economies: When production is carried out on a large scale, the firm can fully utilize the unused capacity of the indivisible factors (e.g. plants and machines)   and thereby reduce the average cost of production and enjoy economies of scale.

Types of Internal Economies of Scale

• Managerial Economies:

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A large firm can afford to employ specialists and apply the principle of division of  labor  in management. Experts can be employed e.g. production, sales transport and personnel departments.

Types of Internal Economies of Scale

Financial Economies

• The lenders of the give importance to the bigger firms. One believes that bigger firms are more creditworthy.

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Types of Internal Economies of Scale

• By-Products

 By Products are also generated in the process of Production.

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Types of Internal Economies of Scale

• Better Utilization of Inputs

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Due to wear and tear of machine it needs maintenance and servicing a bigger firm can adjust and can skip the intake of loss.

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Types of Internal Economies of Scale

Economies of Inventory

Marketing Economies

A bigger firm has the advantage of buying and selling in bulk.

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Advertising

A company can make a financial advantage by effective use of Ads or promotion.

Risk Economies

A big firm has better command over its resources. The risk faced by it is averaged out. The firm can compensate for the loss through the profit of another service. This is not an option for smaller firms.

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Types of Internal Diseconomies of scale

Efficiency to inefficiency:

• Once the output crosses the optimum level the efficiency in management will give away to managerial inefficiency. Elements of mismanagement will creep in.
• Effective supervision will no longer be possible.

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Types of Internal Diseconomies

• Administrative difficulties: Administration, beyond a point becomes unwieldy and impersonal.
• Industrial Unrest: As the scale of operation begins to expand and the number of workers goes on increasing much of personal contact is lost between the workers and the management.

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Types of Internal Diseconomies

• Enhancement of Risks: The larger the scale of production, the greater will be the element of risk involved. 

Types of Internal Diseconomies

• Increasing Costs: The total cost of purchase, storage, distribution etc will also be high as the firm expands its scale of operation beyond optimum, its demand for raw material will increase, so also its demand for capital,   land and  labor  will rise and therefore the prices of these factors will start rising. 

External Economies of Scales�

• External Economies are those advantages which accrue indirectly and externally from the growth, not in the size of the firm but in the size of the industry as a whole. These advantages are not firm specific. 

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�Types of External Economies of Scales�

• Economies of Concentration: Economies of concentration arise mainly from the localization of an industry in a particular geographical region.

Types of External Economies of Scales

•  Economies of Information: As an industry grows in size, the workers doing the same type of job or making the same kind of product group themselves together in unions, associations and societies and issue periodicals and publications which help in exchanging of information regarding research, etc. It help the firms in reducing the cost.

Types of External Economies of Scales

• Economies of Disintegration:   When a firm initially do production, it may have to produce every part of the good itself, but when the industry expands, a particular firm may specialize in the production of only one particular part and supply it to the whole industry. This is called the process of vertical disintegration.

External Diseconomies�

Excessive concentration or localization of industries will result in diseconomies for the firms located within that region. The economies of transport, communication, labor and managerial economies will all be converted into diseconomies.

Types of Diseconomies of Scale

• Diseconomies of Pollution
•  Limited Natural Resources
•  Infrastructure Diseconomies
• Poor Communication
• Inefficient Management
• Higher Costs of Resources
• Greater Levels of debt and interest

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