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MBA-CM - ME - Lecture 11 Producer Behaviour
MBA-CM - ME - Lecture 11 Producer Behaviour
NMIMS University
Dipankar De
Mumbai, August 2007
1
Economies of Scale and Economies
of Scope
•Economies of Scale
– Product-specific economies, which include specialisation and learning curve
effects
– Plant-specific economies, such as economies in overhead, required reserves,
investment, or interactions among products (economies of scope)
– Firm-specific economies, which are economies in distribution and
transportation of a geographically dispersed firm, or economies in marketing, sales
promotion, or R&D of multi-product firms.
•Diseconomies of Scale
– Large enough operation may increase input prices
– Disproportionate rise in transportation costs
– Management coordination problems
– Labour specialisation and repetitive work too little stimulation, hence,
productivity suffers
3
Internal and External Economies of
Scale
•Internal economies of scale are of various types – technical, commercial,
financial, managerial, etc.
–Managerial inefficiency may creep in, when the firm grows very large.
•External economies are cost advantages that result from the general
development of the industry.
•When the industry expands, it offers specialisation and skill formation and for
vertical and lateral integration.
• Finally, when there are diseconomies of scale, MC> AC, we have E5C >1.
Economies of Scale
6
Economies of Scope
C (q 1,q 2 ) C (q 1, 0) C (0 , q 2 )
7
Economies of Scope
8
Learning Curve
L A BN
• where N is the cumulative output, L is the labour/output, A, B, and are
constant, with A, B>0 and are constant, with A, B>0 and 0 1
9
Learning Curve
• Firm’s MC and AC of producing a given level of output fall – mainly for 4 reasons:
1. Workers become adept after first few times, and their speed increases.
11
Learning Curve
• A firm’s average cost of production can decline over time because of growth of
sales when increasing returns are present (a move from A to B on curve AC1),
or it can decline because there is a learning (a move from A on curve AC1to C
on curve AC2).
Cost
A Economies of scale
Learning AC1
C
AC2
Output 12