Economies And Economies And diseconomies of scalediseconomies of scale

Economies and Diseconomies Economies and Diseconomies of scaleof scale

• Economies of Scale lead to cost saving and Economies of Scale lead to cost saving and The Diseconomies of scale lead to the rise The Diseconomies of scale lead to the rise in cost. Economies and Diseconomies of in cost. Economies and Diseconomies of Scale also determines the returns to scale. Scale also determines the returns to scale. When the economies are more that the When the economies are more that the diseconomies, the returns to scale increase. diseconomies, the returns to scale increase. When the Diseconomies are more than the When the Diseconomies are more than the economies, the returns to scale decrease. economies, the returns to scale decrease. When the economies balance the When the economies balance the Diseconomies, The returns to scale are Diseconomies, The returns to scale are constantconstant

Economies Of ScaleEconomies Of Scale

The economies of Scale are classified The economies of Scale are classified as:as:

• Internal Or Real EconomiesInternal Or Real Economies

• External or Pecuniary EconomiesExternal or Pecuniary Economies

Internal EconomiesInternal Economies

• Internal economies are those which Internal economies are those which arise from the expansion of the plant arise from the expansion of the plant size of the firm and her internalized. size of the firm and her internalized. This means internal economies are This means internal economies are exclusively available to the exclusively available to the expanding firm.expanding firm.

Internal EconomiesInternal Economies

• Internal Economies may be classified Internal Economies may be classified under the following categoriesunder the following categories

1.1. Economies in ProductionEconomies in Production

2.2. Economies In MarketingEconomies In Marketing

3.3. Managerial EconomiesManagerial Economies

4.4. Economies in Transport and StorageEconomies in Transport and Storage

External Economies Of ScaleExternal Economies Of Scale

• External economies accrue to the External economies accrue to the expanding firms from the advantages expanding firms from the advantages arising outside the firm. External arising outside the firm. External Economies accrue to the large size firms Economies accrue to the large size firms in the form of discounts and concessions in the form of discounts and concessions onon

1.1. Large Scale purchase of raw materialLarge Scale purchase of raw material2.2. Large scale purchase of external FinanceLarge scale purchase of external Finance3.3. Massive Advertisement CampaignsMassive Advertisement Campaigns4.4. Large Scale hiring of means of transport Large Scale hiring of means of transport

and warehousesand warehouses

Diseconomies of ScaleDiseconomies of Scale

• Diseconomies of scale are Diseconomies of scale are advantages that arise due to the advantages that arise due to the expansion of production scale and expansion of production scale and lead to the rise in the cost of lead to the rise in the cost of productionproduction

Internal DiseconomiesInternal Diseconomies

• Like everything else, economies of scale Like everything else, economies of scale have a limit too. This limit is reached have a limit too. This limit is reached when the advantages of division of labor when the advantages of division of labor and managerial staff have been fully and managerial staff have been fully exploited; excess capacity of plant, exploited; excess capacity of plant, warehouses, transport and warehouses, transport and communication systems, etc is fully communication systems, etc is fully used; and economies in advertisement used; and economies in advertisement cost tapers off.cost tapers off.

Managerial InefficiencyManagerial Inefficiency

Diseconomies arise first at the Diseconomies arise first at the management level. Managerial management level. Managerial Inefficiencies arise for the expansion Inefficiencies arise for the expansion of scale itself. With fast expansion of of scale itself. With fast expansion of production scale, personal contacts production scale, personal contacts and communications betweenand communications between

1.1. Owners and managersOwners and managers2.2. Managers and laborManagers and laborGet rapidly reducedGet rapidly reduced

Labor InefficiencyLabor Inefficiency

• Another source of diseconomy is the Another source of diseconomy is the overcrowding of labor leading to a overcrowding of labor leading to a loss of control over labor productivity. loss of control over labor productivity. Also, increase in number of workers Also, increase in number of workers leads to increase in labor union leads to increase in labor union activities which simply means the activities which simply means the loss of output per unit of time and loss of output per unit of time and hence rise in the cost of production.hence rise in the cost of production.

External DiseconomiesExternal Diseconomies

• External Diseconomies are the External Diseconomies are the advantages that arise outside the advantages that arise outside the firm, I the input markets and due to firm, I the input markets and due to natural constraints, specifically in natural constraints, specifically in agriculture and extractive industriesagriculture and extractive industries