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-DISECONOMIES _, , , , , , , , , , , , , , , , , , , , ’, , , , 8.1 Meaning, , 8.2 Internal Economies and Diseconomies of Scale, , 8.3 External Economies and Diseconomies of Scale, , , , Economies and diseconomies of scale are of two types, viz; internal and, external. Internal economies and diseconomies are those which a firm, reaps as a result of its own expansion. On the other hand, external |, economies and diseconomies are those which a firm reaps as a result of, the growth of industry as a whole. They are external because they accrue, to the firms from outside., , The internal economies and diseconomies of scale affect the shape of the, long run average cost curve. Internal economies of ss cause ne one =, average cost to fall, while internal diseconomies of seal ee long rut, average cost to rise as output increases. On the other Lae aieue, economies and diseconomies of scale affect the position: nda te, runand long run average cost curves. External econ, , - ‘ i the cost curve., cost curve, while external diseconomies shift up RA

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Od, , tal, of, ue, , f, t, |, |, , }, , he}, , ARES, , ae, , , , i 149, Economies and Diseconomies of Scale, , , , , le production., , Internal economies of scale are the advantages of large sal! J, They are enjoyed by the firm when it increases its scale of production. They ., accrue to the firm from it's own actions. They affect the shape of the longrunaverage cost curve. They are responsible for increasing returns to scale., According to many economists, internal economies arise due to, indivisibility of some factors. As the output increases the large indivisible, factors can be used more efficiently and, therefore, the firm experiences, increasing returns to scale. The internal economies of scale are classified, , into two:, A. Real economies of scale, and, , B. Pecuniary (i.e. monetary) economies of scale., , , , , , INTERNAL ECONOMIES OF SCALE, , t, , , , , , , , , , v, Real Economies Pecuniary Economies, v v v v, Production: Marketing Managerial Transport & Storage, Economies Economies Economies Economies, Labour Technical Inventory Economies Economies Economies, , A. REAL ECONOMIES OF.SCALE, , Real economies are those which are associated with a reduction in the, , physical quantity of inputs such as raw materials, varying types of labour, and various types of capital. They are mostly associated with indivisibilities, or lumpiness of units of factors of production. The important kinds of real, , economies are:, 1. Production economies, , 2. Marketing economies

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Business Economics - [ (BMS, BAF, BEM BBL: 5, Managerial economies and : Mey, , Transport and stora ge economies, , Production Economies: Production economies arise from the Us, factors of production in the form of (i) Labour econom,*, (ii) technical economies and (iii) inventory economies res, , (i) Labour Economies: As the size of output increases the firm enjo, labour economies due to (a) specialisation, (b) time-savin, . ‘ \, automation of the production process and (d) ‘cumulatiy,, volume' economies. As the size of production increases the fir,, , can enjoy the advantages of division of labour and specialisation, , of labour which increase the productivity of the various types of, labour. The advantages of division of labour is emphasized by, , Adam Smith in his book, 'The Wealth of Nations' published jn, , 1776. Division of labour also saves the time lost in changing from, , one type of work to another. Division of labour promotes, , invention of tools and machines which, in turn, leads to, mechanisation of the production process. This facilitates labour, to do the work of many and therefore, increases the labour, productivity. Further, large scale production helps the technical, personnel to acquire considerable experience from the, ‘cumulative effect', This ‘cumulative volume' experience leads, , to higher productivity. Hence, as the size of output increases the, unit cost falls., , (ti) Technical Economies: The important technical economies result, from the use of specialised capital equipment which becomes, possible only when the output is produced on a large scale., Technical economies also arise from the indivisibilities which, , , , are the characteristics of the modern techniques of production., In other words, as the scale of production increases the firm reaps, the advantages of mechanisation of using mass production, methods. This will reduce the unit cost of production. Technical, economies are also the result of innovations and discoveries., , (iii) Inventory Economies: The role of inventories is to, to meet the random changes in the input and theo., the operations of the firm. The purpose . inventori, out the supply of inputs and meeand yet outputs. Inventories, , of spare parts, raw materials and finished products ittiengecigh, , help the firm, utput sides of, es is to smooth, , cud, , , , ik t they do not increase ro ., , : F production, but Portio, athe ae in the size of output. Therefore oa!, wi he :, , ‘ © size of, t increases the firm can hold smaller Percentage a, ‘ anges!, ins tories to meet random changes, inven

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Economies and Diseconomies of Scale, , 2, , B., , 151, , ing, of the, Marketing Economies: They are associated with the selling, , product of the firm. They arise from advertising economes: = tre, advertising expenses increase less than proportionately ‘ts re, increase in output, the advertising costs per unit of output fa S like, output increases. Similarly, other sales promotion expenditure och, samples, salesmen force, etc. also increase less than proportionately, with the output. Further, a large firm can have special arrangements, with exclusive dealers to maintain a good service department for the, product of the firm. Hence, the average selling costs fall with the, increase in the size of the firm., , Managerial Economies: Large scale production makes possible the, division of managerial functions. Thus, there exists a production, manager, a sales manager, a finance manager, a personnel manager, and so on in a large firm. However, all or most of the managerial, decisions are taken by a single manager in a small firm. This division, of managerial functions increases their efficiency. The decentralisation, of managerial decision making also increases the efficiency of, management. Large firms are also in a position to introduce, mechanisation of managerial functions through the use of telex, machines, computers, and so on. Hence, as output increases the, managerial costs per unit of output continue to decline., , Transport and Storage Economies: As the output increases, the unit, cost of transportation of raw materials, intermediate products and, finished products fall. This is because a large firm may be able to, reduce transport costs by having its own transportation means or by, using larger vehicles. Similarly, as the size of the firm.increases the, storage costs will also fall., , PECUNIARY ECONOMIES, , Pecuniary economies (i.e. monetary economies) are those economies, realised by the firm from paying lower prices for the factors used in, production and distribution of the product due to bulk buying by the firm., They accrue to the firm on account of discounts it can obtain due to its, large scale production. They reduce the money costs of the factors for a, particular firm. / : :, , The pecuniary economies are realised by a firm in the following ways:, , (i), , (ii), , The firm will be able to get raw materials at lower prices due to bulk |, buying., , A large firm can get funds at lower cost, that is, at a lower rate of, interest due to its reputation in the money market.

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v, FM, BBL: § p, 152 _ Business Economics - I (BMS, BAF, B EM., , sa tes if they adve,,., (iii) The large firm may be given lower advertising 14 y Stig,, ina large scale., , a |, . unt of commogit, |, (iv) Transport rates may be also low if the amount of Oditie, |,, , transported are large., , Internal Diseconomies of Scale, , Internal economies of scale exist only upto a certain size of the plant. This, size of plant is known as the optimum plant size because with this size of, plant all possible economies of scale will be fully exploited. If the Size of, the plant increases beyond this optimum size there arise diseconomies o, scale (i.e. decreasing returns to scale) especially from manageria|, diseconomies. It is argued that technical diseconomies can be avoided by, duplicating the optimum technical size of the plant., , . The most important cause for diseconomies of scale is the diminishing, returns to management. As the output grows beyond certain level the top, management becomes overburdened. Hence, it becomes less efficient as, coordinator‘and ultimate decision maker. Thus, increase in the size of the, plant beyond a certain large size makes the managerial structure more, , complicated and reduces the overall efficiency of the management., , Another cause for diseconomies of scale may be the exhaustible natural, , resources. For instance, doubling of the fishing fleet may not lead toa, doubling of the catch of the fish., , , , , 8.3 EXTERN., DISECONOK, , , , External Economies, , , , lhe external economies are the advantages a firm enjoys as a result of, provement in the industrial environment in which the firm operates., !hey are external to the firm, but internal to the industry to which the, , firms belong. They may be realised from the en oe firms in the, ; ‘ ry. Their effect is S 5, , same industry or in another industry. T agen ease ‘ shia change in, , the prices of factors employed by the firm. They n the short, “roene » firm., run and long-run cost curves of the fir, , ], , Bfeeeteaf ira