Economies and Diseconomies of Scale (Internal (Internal Economies : Refers…
Economies and Diseconomies of Scale
: Refers to the decrease in average cost when the scale of production expands.
1) :star:Technical Economies of Scale
A firm is able to take a product through several steps in its manufacture.
Saves time and costs in transport, hence lower unit costs.
Specialization and division of labour
Production process is broken down into simpler and repetitive process
Less training needed, less time lost and lower unit costs.
A firm producing on a large scale can spread its fixed costs, such as the cost of machinery over a larger output, thus lowering unit costs
Better products, cheaper methods of production and large scale of production helps to spread huge R&D costs over a larger output, thus lowering unit costs.
2) Managerial Economies of Scale
Larger firms are able to afford to create more specialized departments where specialists perform specific administrative functions. These specific administrative functions include human resource, purchasing, finance and marketing. Greater specialization in these areas of expertise will lead to greater efficiency resulting in a fall in average cost.
3) Organisational Economies of Scale
Larger firms are able to spread overheads such as marketing cost and training cost over a larger amount of output. Spreading overhead will lead to lower overheads per unit of output resulting in a fall in average cost. For example, as the cost of an advertisement is independent of the amount of output produced, larger firms that produce a larger amount of output have a lower marketing cost per unit of output.
4) Purchasing Economies of Scale
Larger firms produce a larger amount of output. Therefore, they require a larger output of factor inputs. It follows that larger firms are able to obtain a higher trade discount for the larger amount of factor inputs that they purchase which will lead to a fall in their average costs.
5) Financial Economies of Scale
Banks deem larger firms to be more credit-worthy and allow borrowing of funds at lower interest rates, thus lowering unit costs.
6) Container Principle
A container costs less per unit of output the larger the size. The cost of a container depends directly on the amount of materials used to make it and hence the surface area. However, the capacity of a container depends directly on the volume. Therefore, larger containers have a bigger volume relative to surface area and hence larger firms that use larger containers have a lower container cost per unit of output which will lead to a fall in average costs.
: Refers to the increase in average cost when the scale of production expands.
1) When division of labor increases to a high degree, workers may become demotivated as performing the same task all the time may lead to boredom.
2) This is especially true if the task is mundane. If this happens, labour productivity will fall which will lead to rise in average cost.
1) Problems in communication arise when firms expand, and the task of coordinating and managing activities becomes increasingly difficult.
2) Results in delays in production that can be costly to the firm.
3) The larger the firm, the greater the chances of problems in communications.
4) Firms with large number of employees working in many levels of hierarchy may experience greater dissatisfaction at the lower hierarchies , leading to lower productivites.
: Refers to the increase in average cost when the industry expands.
Higher input prices due to greater demand for factors of production. Demand for inputs become increasingly price-inelastic.
Increasingly strain on infrastructure due to limited resources, leading to a rise in environmental problems and delays in production.
: Refers to the decrease in average cost when the industry expands.
Economies of information
Firms can obtain information at a cheaper rate by sharing the cost of research.
Economies of disintegration
Occurs when the industry is heavily localized and firms are able to split up the production process and specialize in only one.
Components can then be mass-produced to supply the whole industry, leading to lower costs.
Economies of concentration
Occurs when many firms carrying out similar activities are located very close to one another.
Trained workers are readily available in the area and cost to train and look for suitable employees is reduces.
Operating costs are also lowered due to better infrastructure.