INTERNAL ECONOMIES AND DISECONOMICS OF SCALE PDF

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What are the INTERNAL ECONOMIES AND DISECONOMICS OF SCALE., what are the factors affecting INTERNAL ECONOMIES AND DISECONOMICS OF SCALE....

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INTERNAL ECONOMIES AND DISECONOMICS OF SCALE

INTERNAL ECONOMIES Internal economies are those which are open to a single factory or single firm independently of the action of other firms. They result from an increase in the scale of output of a firm and cannot be achieved unless output increases. Internal economies mean increasing return to scale. These are the result of increased division of labour or the use of improved. TYPES OF INTERNAL ECONOMIES 1) REAL ECONOMIES –Real economies are those associated with a reduction in the physical quantity of inputs, raw materials, various types of capital. 2) PECUNIARY ECONOMIES- Are economies relised from paying lower price for the factor of production and distribution of product due to bulk buying by the firm as its size increases. Ex- Firms producing on large scale get raw material at low price since they have to purchase the same in large bulk. FACTOR RESPONSIBLE FOR INTERNAL ECONOMIES 1) TECHNICAL ECONOMIES Technical factors affect the return to scale. Bigger firms are having more of resources and are able to install suitable machinery. Technical economics may arise out of any one of the reasons a) Economies of increase of dimension b) Economics of linking of process. c) Economies of the use of by-products.

2) MANAGERIAL ECONOMIES With the increase in the scale of production a firm can benefit by specializing its managerial department. A small firm cannot afford the specialization. 3) LABOUR ECONOMIES Large firm employees, a large number of workers. Each worker is given the kind of job he fit for.

DISECONOMIES OF SCALE A firm can enjoys economies only upto a certain limit. Having reached this limit, these very economies turn into diseconomies. In other words, a given percentage increases in all the factors causes less than proportional increase in output, after a point. Consequently diminishing returns to scale operate. This diseconomy of scale may be of two types1) Internal diseconomies 2) External diseconomies 1) INTERNAL DISECONOMIES Internal diseconomies are those factors which raise the cost of production of a firm as its scale of production is increased beyond a point. This diseconomies occurs due to followinga) UNWIDELY MANAGEMENT- it becomes difficult to Coordinate and supervise the work of different departments as specialization increases due to large sized firm. Beyond a limit Operational efficiency of top management falls. b) TECHNICAL DIFFICULTIES- as division of labour is pressed beyond a point, indivisibility factors comes in. Every machine has an optimum capacity for work. If this proportion is exceeded, internal diseconomies follow. 2) EXTERNAL DISECONOMIES External diseconomies are not suffered by a single firm but by the firms operating in a given industry. These diseconomies arise due to much concentration and localization of industries beyond a certain stage. Localization leads to increased demand for transport and therefore transport costs rise. Similarly as an industry expands there is scarcity of some raw material or the other raw material. As a result costs starting rising. As an industry expands there are difficulties of obtaining skilled workers, finance because other industries also compete for them. As a result of all two factors, external diseconomies becomes powerful....