analysis of economies of scale

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ANALYSIS OF ECONOMIESOF SCALE


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CHART SHOWINGECONOMIES OF SCALE


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CHART CONTINUED


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CHART CONTINUED


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INTRODUCTION

What Does Economies Of Scale Mean?

The increase in efficiency of production as the number of goods being produced increases.Economies of scale , refers to thecost advantages that a businessobtains due to expansion. There arefactors that cause a producersaverage cost per unit to fall as the

scale of output is increased." "


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INTERNAL ECONOMIES

Internal economies are thosewhich arise from the firmincreasing its plant size. Internal

economies are of two types:Real

Pecuniary


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REAL ECONOMIES OF SCALE

Real economies arise when thequantity of inputs used for agiven level of output decreases.

Real economies scale are of 4kinds:

1. Production economies

2. Marketing economies

3. Managerial economies

4. Transport and storage


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PRODUCTION ECONOMIES

Production economies mayarose from the factor labour, fromthe factor fixed capital or from the

inventory requirements of the firm.LABOUR ECONOMIES

Labour economies are achievedas the scale of output increases forseveral reasons:

a.


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TECHNICAL ECONOMIES:Technical economies are

associated with the fixed capitalwhich includes all types of machinery and other equipments.

The main technical economies

arise from:

a. specialization and indivisibility

of capital


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INVENTORY ECONOMIES:

Role of inventories is to meet therandom changes in the input andthe output size of the operations of the firm. It has been found that theinput as well as output inventoriesincrease at a rate lower than thatof increase in output.


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Marketing Economies

Selling economies are associatedwith the distribution of the productof a firm. The main type of the

economies area. advertising economies

b. other large scale economies

c. economies with specialarrangements with exclusivedealers

. m l h n n mi .


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Advertising expenses isgenerally found to have increasedless than proportionately with the

scale. Thus the larger the outputthe smaller the advertising cost perunit.

Other types of selling activitiessuch as the salesman force, thedistribution of samples , etc arelarge scale promotion expenditurewhich increase b less than


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Large firms can enter exclusiveagreement with distributors whoundertake the obligation of

maintaining a good servicedepartment for the product of themanufacturer.

In modern industry firms needto change the style of their productquite frequently in order to meetthe demands of their customersand the com etition of the rival


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MANAGERIAL ECONOMIES

Managerial costs are partlyproduction costs and partlyselling costs. Managerial

economies arise because:a. larger the firm greater are

the opportunities for the division of

managerial tasks. The division of managerial tasks helps managersto specialize in their own areas of responsibilities thus leading to

reater efficienc .


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c. In a large firm withdecentralization in decision makingthe delays in the flow of

information is reduced therebyincrease in the efficiency of management.

d. Large firms provideopportunities for the introduction of modern managerial techniques andorganizational restructuring. Thishel the mana ement to increase


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TRANSPORT AND STORAGE

Transport cost had incurred partlyon the production side and partlyon the selling side of the firm.

Storage cost obviously fall with theincrease in the size of output as itprovides the economies of increased dimension.


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PECUNIARY ECONOMIES OF SCALE

These are economies accruing tothe firm due to discounts that itcan obtain due to its large scale

operations. The discount may be inthe nature of :

a. lower raw material price due

to bulk buyingb. lower cost of capital, as

banks usually plays greater faith in

the large firms and therefore


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c. offers of lower rates foradvertising to large firms becauseof their large scale advertising

d. Lower transportation rate dueto bulk transportation

e. in case the large form is ableto create an image of prestige tobe associated with the firm it maybe in a position to save on labour

cost by paying lower wages and


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EXTERNAL ECONOMIES

Like internal economies externaleconomies also help in cuttingdown production cost with an

expansion of an industry, certainspecialized firm also come up forworking up the by-products andwaste materials. Thus a firmbenefits from expansion of anindustry as a whole.


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DISECONOMIES OF SCALE

When a firm continues toexpand its size a stage comeswhen diminishing returns to scale

set in. As a firm expands beyond alevel it encounters growingdiseconomies.

Technical factors are unlikely toproduce diseconomies of scale.When diseconomies of scale arisethey are more likely to beassociated with the human and


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Secondly there is the problem of moral and motivation of bothmanagement and labour force.

In short, we may say thatdecreasing returns to scale willbecome operative when

management becomes a problem.


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THANK YOU

analysis of economies of scale

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