ECONOMICS OF SCALE-EE&FA/C- CS.FINAL YEAR

1. Dr.K.Baranidharan
Present by…
131-07-2013

2. Engineering Economics
& Financial Accounting
ECONOMICS
SCALE
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3. ECONOMICS SCALE
• Alfred Marshall divides the
economics of scale into two
groups:
• Internal and External
• Economics of scale occur in
the Long-run
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4. What is 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 or production.
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5. What is diseconomies of scale?
• Diseconomies of scale are the
disadvantages of being too large. 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.
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6. Internal and External economies of
scale.
• Internal economies of scale :-
lower long run average costs
resulting from a firm growing in
size.
• External economies of scale :-
lower long run average costs
resulting from an industry
growing in size. 631-07-2013

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
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8. Types of Internal economies of scale.
• Buying economies
• Selling economies
• Managerial economies
• Financial economies
• Technical economies
• Research and development economies
• Risk-bearing economies.
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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. 931-07-2013

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.
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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 to1131-07-2013

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. 1231-07-2013

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.
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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.
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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.
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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.
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17. 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. 1731-07-2013

18. External economies of scale.
• Specialist services – Universities and colleges ma 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. 1831-07-2013

19. 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. 1931-07-2013

20. Dr.K.Baranidharan
Thank you
K YOU
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21. 2131-07-2013