Economics Scale

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Dr.K.Baranidharan

• Present by

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Engineering Economics Financial Accounting

• ECONOMICS SCALE

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ECONOMICS SCALE

• Alfred Marshall divides the economics of scale
  into two groups
• Internal and External
• Economics of scale occur in the Long-run

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What is economies of scale?

• Economies of scale are the cost advantages that a
  business obtains due to expansion. When
  economists are talking about economies of scale,
  they are usually talking about internal economies
  of scale. These are the advantages gained by an
  individual firm by increasing its size i.e having
  larger or more plants or production.

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What is diseconomies of scale?

• Diseconomies of scale are the disadvantages of
  being too large. A firm that increases its scale
  of operation to a point where it encounters
  rising long run average costs is said to be
  experiencing internal diseconomies of scale.

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Internal and External economies of scale.

• Internal economies of scale - lower long run
  average costs resulting from a firm growing in
  size.
• External economies of scale - lower long run
  average costs resulting from an industry growing
  in size.

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Internal and external diseconomies of scale.

• Internal diseconomies of scale -higher long run
  average cost arising from a firm growing too
  large.
• External diseconomies of scale- higher long run
  average costs resulting from an industry growing
  too large

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Types of Internal economies of scale.

• Buying economies
• Selling economies
• Managerial economies
• Financial economies
• Technical economies
• Research and development economies
• Risk-bearing economies.

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Buying Economies.

• These are the best known type. Large firms that
  buy raw materials in bulk and place large orders
  for capital equipment usually receive a
  discount. This means that they have paid less for
  each item purchased. They may receive a better
  treatment because the suppliers will be anxious
  to keep such large customers.

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Selling Economies.

• Every part of marketing has a cost particularly
  promotional methods such as advertising and
  running a sales force. Many of these marketing
  costs are fixed costs and so as a business gets
  larger, it is able to spread the cost of
  marketing over a wider range of products and
  sales cutting the average marketing cost per
  unit.

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Managerial Economies.

• As a firm grows, there is greater potential for
  managers to specialize in particular tasks (e.g.
  marketing, human resource management, finance).
  Specialist managers are likely to be more
  efficient as they possess a high level of
  expertise, experience and qualifications compared
  to one person in a smaller firm trying to perform
  all of these roles.

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Financial economies

• Many small businesses find it hard to obtain
  finance and when they do obtain it, the cost of
  the finance is often quite high. This is because
  small businesses are perceived as being riskier
  than larger businesses that have developed a good
  track record. Larger firms therefore find it
  easier to find potential lenders and to raise
  money at lower interest rates.

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Technical Economies.

• Businesses with large-scale production can use
  more advanced machinery (or use existing
  machinery more efficiently). This may include
  using mass production techniques, which are a
  more efficient form of production. A larger firm
  can also afford to invest more in research and
  development.

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Research and development economies.

• A large firm can have a Research and Development
  department, since running such a department can
  reduce average costs by developing more efficient
  methods of production and raise total revenue by
  developing new products.

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Risk-bearing economies.

• Larger firms produce a range of products. This
  enables them to spread the risks of trading. If
  the profitability of one of the products it
  produces falls, it can shift its resources to the
  production of more profitable products.

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Internal Diseconomies of scale.

• Growing beyond a certain output can cause a firms
  average costs to rise. This is because the firm
  may encounter a number of problems including
  difficulties -
• controlling the firm.
• communication problems.
• poor industrial relations.

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External economies of scale.

• A skilled labour workforce A firm can recruit
  workers who have been trained by other firms in
  the industry.
• A good reputation An area can gain a reputation
  for high quality production.
• Specialist suppliers of raw materials and capital
  goods When an industry becomes large enough, it
  can become worthwhile for other industries,
  called subsidiary industries to set up for
  providing for the needs of the industry.

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External economies of scale.

• Specialist services Universities and colleges
  ma run courses for workers in large industries
  and banks and transport firms may provide
  services, specially designed to meet the
  particular needs of firms in the industry.
• Specialist markets Some large industries have
  specialist selling places and arrangements such
  as corn exchanges and insurance markets.
• Improved infrastructure The growth of an
  industry may encourage a govt and private sector
  firms to provide better road links, electricity
  supplies, build new airports and develop dock
  facilities.

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External Diseconomies of scale.

• Just as a firm can grow too large, so can an
  industry.
• Larger firms -gt transportation increase -gt
  congestion -gt increased journey time -gt high
  transport cost -gt reduced workers productivity.
• Growth of industry may increase competition for
  resources, pushing up the price of key sites,
  capital equipment and labour.

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Dr.K.BaranidharanThank you

• K YOU

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THE END.