Managerial Economics

3.Cost Function Economies of Scale

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MBA PPG UNIT-2 DISECONOMIES OF SCALE

Today we are going to Discuss with..

1.Economies of Scale.

2.Diseconomies of Scale.

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MBA PPG UNIT-2 DISECONOMIES OF SCALE

Economies of Scale
Meaning: Economies of scale mean lowering of costs of production by producing in bulk Eg: One unit Rs 100 Two unit Rs 180 Three unit Rs 240

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MBA PPG UNIT-2 DISECONOMIES OF SCALE

Economies of Scale
1.The advantages of large scale production that result in lower unit (average) costs (cost per unit). 2. AC = TC / Q. 3. Economies of scale spreads total costs over a greater range of output.
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2.External economies:
1.Internal Economies of scale

2.External Economies of scale

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Economies of Scale
1.Internal Economies of scale : Cost per unit depends on size of the firm. 2.External economies: Cost per unit depends on the size of the industry,not the firm.
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Economies of Scale

Internal Economies of scale : Factors of economies of scale: 1.Specialisation 2.Greater efficiency of machines 3.Managerial economics 4.Financial economies 5.Production in stages
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Economies of Scale

External Economies of scale : External factors: 1.Technological advancement 2.Easier access to cheaper raw materials 3.Financial institutions in proximity 4.Pool of skilled workers
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Economies of Scale
External economies of scale the advantages firms can gain as a result of the growth of the industry normally associated with a particular area. 1. Supply of skilled labour 2. Reputation 3. Local knowledge and skills 4. Infrastructure 5. Training facilities

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MBA PPG UNIT-2 DISECONOMIES OF SCALE

Economies of Scale
Principle of Multiples: 1.Some production processes need more than one machine

2.Different capacities
3.May need more than one machine to be fully efficient
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Economies of Scale
Commercial: 1.Large firms can negotiate favourable prices as a result of buying in bulk.

2.Large firms may have advantages in keeping prices higher because of their market power.

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Economies of Scale
Financial: 1.Large firms able to negotiate cheaper finance deals. 2.Large firms able to be more flexible about finance share options, rights issues, etc. 3.Large firms able to utilise skills of merchant banks to arrange finance.
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Economies of Scale Managerial:

Use of specialists accountants, marketing, lawyers, production, human resources, etc.

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Economies of Scale
Risk Bearing:

1.Diversification 2.Markets across regions/countries 3.Product ranges 4. R&D

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Economies of Scale
Unit Cost Scale A 82p Scale B 54p LRAC

Output
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Diseconomies of Scale
The disadvantages of large scale production that can lead to increasing average costs:

1.Problems of management.
2.Maintaining effective communication. 3.Co-ordinating activities often across the globe! 4 .De-motivation and alienation of staff. 5.Separation of ownership and control.
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Factors Causing Diseconomies of Scale

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Internal Factors
1.Labour unions. 2.Difficulties in teamwork.

3.Loss of coordination.
4.Difficulties in raising funds.
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External Factors
Beyond certain output level most of the economies turn into diseconomies.

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Conclusion:
1.The economies and diseconomies of scale are a phenomenon relating to the long-run cost-output relationship. 2.The Long Run Average Cost first decreases with an increase in output, reaches a minimum point and then finally increases beyond a certain plant size. 3.In the first part, when the long run average cost decreases with the increase in plant size. At the optimal plant size, economies of scale equal the
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4.When we say that there are economies of scale, it does not mean that there are advantages in all aspects.
Normally, it shows that there are advantages in a majority of factors. Thus, economies and diseconomies of scale co exist in all plant sizes. Neither of them is absolute.
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Thank You

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