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. 
       3. Effects of Economies of Scale on Production Costs It reduces the per unit fixed cost. 
       As a result of increased production, the fixed cost gets spread over more output than before. 
       It reduces the per unit variable costs. Economies of scale bring down the per unit variable 
       costs.    This  occurs  as  the expanded  scale  of  production  increases the efficiency  of  the 
       production process. 
       4. What are diseconomies of scale? 
           1.  Diseconomies of scale are the disadvantages of being too large.  
           2.  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. 
       5. Types of economies of scale Internal economies of scale :- lower long run average costs 
       resulting from a firm growing in size.  They refer to economies that are unique to a firm. 
       For instance, a firm may hold a patent over a mass production machine, which allows it to 
       lower its average cost of production more than other firms in the industry. 
       6. External economies of scale :- lower long run average costs resulting from an industry 
       growing in size.  They refer  to  economies  of  scale  faced  by  an  entire  industry.    For 
       instance, suppose the government wants to increase steel production. In order to do so, the 
       government announces that all steel producers who employ more than 10,000 workers will be 
       given a 20% tax break. 
       7. 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 . Thus, firms 
       employing less than 10,000 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. 
       8.  Types  of  Internal  economies  of  scale    Buying  economies    Selling  economies   
       Managerial  economies    Financial  economies    Technical  economies    Research  and 
       development economies  Risk-bearing economies. 
       9. 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. 
       10.  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. 
       11. 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. 
       12. 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. 
       13. 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. 
       14. 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. 
       15. 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. 
       16.  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. 
       17.  Difficulty  controlling  the  firm    It  can  be  hard  for  those  managing  a  large  firm  to 
       supervise  everything  that  is  happening  in  the  business.    Management  becomes  more 
       complex and meetings are necessary quite often.  This can increase administrative costs and 
       make the firm slower in responding to changes in marketing conditions. 
       18. Communication problems  Difficult to ensure that everyone is aware about their duties 
       in a large firm and available opportunities like training etc.  The may not get a chance to 
       exchange their views and innovative ideas to the management team. 
       19. Poor industrial relations  Higher risk for larger firms as there will be more conflicts and 
       diverse opinions.  Lack of motivation of workers, strikes will be seen at certain situations in 
       larger firms due to poor industrial relations. 
       20. 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. 
       21. External economies of scale  Specialist services – Universities and colleges may 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. 
       22. External Diseconomies of scale just as a firm can grow too large, so can an industry. 
       Larger firms transportation increase congestion increased journey time high transport cost 
       reduced workers productivity. Growth of industry may increase competition for resources, 
       pushing up the price of key sites, capital equipment and labour. 
       Note: You will share all the students in your class. 
       Dr. P.Sankaran  
       Assit. Professor 
       PG.Department of Commerce 
       AAGASC, Karaikal.