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
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