Economies of Scale

What is Economies of Scale?

Economies of scale are the cost advantage or benefit a firm or an industry derives, as a result of the expansion of its scope of production, and are typically measured by the amount of output produced per unit of time.

Types of Economies of Scale:

1. Internal economies of scale.
2. External economies of scale.

Internal Economies of Scale:

Internal economies, also known as large-scale production, refers to the benefit of a firm or industry, derived as a result of an internal increase in the level of output, or production. 

Advantages of Internal Economics of Scale: 

1. Technical Economies: Large-scale production enables firms to use advanced plants, and machines, which can double the firm’s output. It ensures the optimum use of resources and utilization of plants and machinery to full capacity. 

2. Managerial Economies: Employment of managerial experts, in different disciplines, will boost the industry. The average cost of management and administration will be low in large firms because many workers are controlled by an expert with high remunerationmoney paid or financial compensation for work or a service. More, who will turn the economy around.

3. Marketing Economies: Large-scale production creates opportunities for the purchase of bulk raw materials. The advertising cost per unit of output falls as output increases. 

4. Financial Economies: Large firms have the opportunity to raise funds for expansion. They have sufficient collateral security. Furthermore, if it offers its share for sales, it will attract more patronage than small-scale production. 

5. Research Economies: Effective research in large-scale production increases efficiency and reduces the cost per unit which in turn enhances the growth of the firm.

6. Welfare Economies: Workers’ efficiency and morale will improve the production process. Large-scale production is in a better position to provide its employees with welfare facilities, such as canteens and recreational equipment.

7. Risk Bearing Advantage: Large-scale production has the ability to take care of risks arising from the business, as a result of a reduction in demand for one of the products.

Internal Diseconomies of Scale (Disadvantages of Large-Scale Production)

These are the disadvantages that arise, as a result of a firm or industry that produces on a large scale. These are what a firm suffers due to expansion in its scope of production.

1. Slow Response to Changes /Bureaucratic Control: These are laid down rules and regulations which affect the workers. This causes unnecessary delays in taking action before a major change can take place. Consultations and meetings at various levels cause delays.

2. Standardized Products: The large-scale production is standard and has quality products. The quality of the goods is exactly the same, in shape, colour and in design.  

3. Impersonal Relationship: This usually exists among the employees of large-scale production. The workers are so many that they rarely have the opportunity to form close relationships.

4. Risk of Monopoly and Unfair Competition: Production on a large scale usually involves unhealthy competition, as each worker struggles to make maximum sales.

5. Chances of Unsold Stock: The production of large quantities can be affected, if the producer’s expectation is not met, the producer will be left with a large amount of unsold products, which results in a waste of resources.

External Economies of Scale:

External economies of scale are the advantages enjoyed by industries, or firms, as a result of the existence of other similar industries or firms. It is the benefit that a firm derives as a result of other businesses, or when there is a concentration of similar firms in a particular area.

For instance, suppose the government wants to increase oil production; In order to do so, the government announces that all oil producers, who employ more than 20,000 workers, will be given a 25% tax break. Thus, firms employing less than 20,000 workers can potentially lower their average cost of production, by employing more workers. This is an example of an external economy of scale, one that affects an entire industry or sector of the economy.

Advantages of External Economies of Scale:

1. Provision of infrastructural facilities such as roads, schools, hospitals, etc.

2. Ensures proper training and development of skilled manpower.

3. Encourages invention and innovation.

4. Increases the growth and development of an organized market.

5. Attraction of subsidiary industries result.

Merits of Large-Scale Production:

1. It leads to Low unit cost of production. 

2. Provision of bulk purchasing advertising, gives room for discounts to be enjoyed by large-scale producers. 

3. It promotes efficiency and specialization.

4. Workers enjoy a large measure of welfare services such as health programs, food canteens, transportation, etc.

5. Large-scale production is effectively and efficiently utilized, small-scale production does not enjoy resources like the large-scale producer.   

6. Large-scale businesses enjoy patronage, and can better finance their productive activities because they receive better patronage from financial institutions, as well as ploughing back their profit.

External Diseconomies of Scale: 

Diseconomies of scale are when firms, or industries, in an area, experience an increase in the cost of production, as a result of the concentration (or competition) of firms in the area.

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