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Internal Economies of Scale: It refers to the reduction in the individual firm’s average cost of production as output increases(scale

of production expands) • • • • • • • • Technical Economies of Scale Managerial Financial Labour Risk-bearing Research Marketing Commercial

Technical: When expansion in scale of operations result in technological advantages (better machinery, etc) Also , if, for example , the size of the plant doubles, it doesn’t imply that the labour required or the cost of production also doubles. e.g. A Machine ‘A’ that makes 10,000 chocolates a day will NOT cost 10 times as much as a machine B that makes 1,000 chocolates a day. Neither will A require 10 times the space or labour used by B. Therefore, production becomes more cost effective Managerial: It arises from specialization and mechanization of management of a firm when it expands it’s scale of production. e.g. In a small company, the manager is also the worker, the foreman, and the manager. He hence wastes his time on small jobs. However, if the firm expands, there is specialization of management, and so the manager can delegate these tasks to junior employees. Therefore the firm is able to have specialized managerial staff looking after each department. Financial If a firm increases it’s size of operations, larger financial resources are available to it at lower costs-big firm more credible, can receive loans more easily e.g. Reliance, Tata and Birla Grp Companies are prime customers for any bank in India and attract the least rates of interest. On the other hand, some small scale industry will have to pay a higher rate of interest to the bank, as it is not viewed as very credit worthy. Marketing Economy When a firm increases it’s scale of operations, it is able to employ mass marketing strategies, such as T.V. advertising

manufactured by Parle Agro Pvt. Sunsilk and Dove shampoos. rin. First Research activity was carried out in 1973. Lakme beauty products. dexterity. Diversification basically impacts it’s strength and stability and makes it less vulnerable to changes in commercial forms. Therefore more output per unit of factor input(labour) e. stitching. Now. It was because of the tagline itself (mango fruity fresh and juicy) that it’s popularity increased. Clinic plus shampoo. prompt delivery. Risk-bearing When a firm expands it’s scale of operations. pressing. Lipton Tea. Vim dishwash. Research Large scale firms can afford to have R&D departments which aim at developing new products and new methods of production. Ranbaxy. As the output grew. If the scale of operations of the firm expands. e. Hindustan Unilevers Ltd. Pepsodent and Close Up. E.g. it can employ more labour. it leads to division of labour and their specialization. as she does only a PART of the job instead of the whole production process. sugar.g. milk in bulk and hence receives discounts. It buys raw materials like cocoa. So. when a company . cutting. e. therefore each labourer is involved in the whole process of producing one shirt—measurement of cloth. if one part of the company has a loss.g. it can afford to take risks and also eliminate them. it established it’s first R&D center in 1994. When Ranbaxy drew out an ambitious global plan. it has a state of the art multi disciplinary center for research. 4325 million Commercial When a firm expands it’s scale of operations. They also secure freight concessions from railways and road transport. and it’s R&D expdt. It does not have much labour. Large firms have bargaining advantages when they buy in bulk.g. This makes an individual labourer excel at his/her job in terms of speed. In 2008 was around Rs. the company invested more in it’s advertisement campaigns. a company like Cadbury.g. Ltd. it gets advantages in the purchase of raw materials and in the sale of goods. (company will have enough capital to overcome the loss) Labour As the scale of the firm increases. carful attention from dealers. Lux soaps. Mango Frooti. etc. Imagine a small scale firm ‘A’ that produces ready made shirts. It does this by diversifying output.—some of it’s brands include Kwality Walls icecream. surf. skill. e. other parts of the company can support it.e. Therefore the labour gets specialized in one aspect of the whole production process.g.

while the output increases. Bihar Dump effluents like Calcium carbonate. if there is overcrowding of industries. Many industries located along the banks of the Penna River in Anantpur. If a group of textile industries are concentrated in a place producing . say. And As labour is limited. higher rents. This reduces the scope for fishing and hence poses an externality to the fishing industry. Therefore prices go up. Thus cost of production increases. • If there is overcrowding of firms in a particular area. e. higher rates of interest for procuring bank loans. Leads to higher wage rates. it is known as external diseconomies of scale.g. it receives discounts on bulk order. • Enivornmental Diseconomies: Firms incur pricate costs in producing chemicals.purchases steel from SAIL. cotton. A steel factory produces a lot of smoke which causes health problems to the people living in neighbouring areas Nuclear Plants generate a radioactive atmosphere. .g. lead and other substances that contaminate the water body. there is more competition between the firms for limited factors of production and raw materials. an upstream pulp mill discharges effluents in the river. as well as “doorstep deliver” External Diseconomies of Scale: When external factors outside the control of the company increases its average costs. but don’t pay for any of the social costs e. which can slow up deliveries and will lead to an increase in transport costs. wage rates will increase. then the resources will start to deplete. it can cause road congestion. • Market Diseconomies: When an industry expands.