Name-Aswathy Vijayakumar

Class-FYBMS
Roll No.02
Subject-Economics
 Economies and Diseconomies
Of Scale
Meaning
Economies and Diseconomies of Scale. Economies of scale refer to these
reduced costs per unit arising due to an increase in the total output.
Diseconomies of scale, on the other hand, occur when the output increases to
such a great extent that the cost per unit starts increasing.
Types of Economies of Scale
The Economies of Scale may be divided into two categories-
1) Internal Economies: Internal Economies are the real economies which arise
from the expansion of the organisation. These economies are the result of
the growth of the organisation itself. They affect the shape of the long-run
average cost curve. They are responsible for increasing returns to scale.
According to many economists, internal economies arise due to
indivisibility of some factors. As the output increases the large indivisible
factor can be used more efficiently and, therefore, the firm experiences
increasing returns to scale. The internal economies of scale are classified
into two
A) Real Economies Scale
B) Pecuniary Economies Scale
 Production Economies Marketing Economies

Real
Economies

Transport & Storage

Managerial Economies
Economies

Labour
Economies

Production
Economies

Technical Inventory
Economies Economies

A) Real Economies
Economies of scale occurs when more units of a good or service can be
produced on a larger scale with (on average) fewer input costs. External
economies of scale can also be realized whereby an entire industry benefits
from a development such as improved infrastructure. The important kind of real
economies
1. Production economies
2. Marketing economies
3. Managerial economies
4. Transport economies

1) Production economies:
Production arise from the use of factors of production on the form of (i)
labour economies (ii) technical economies (iii) inventory economies
(i)Labour economies:
As the scale of production is expanded their accrue many labour
economies, like new inventions, specialization, time saving production
etc. A large firm employs large number of workers. Each worker is given
the kind of job he is fit for. The personnel .officer evaluates the working
efficiency of the labour if possible. Workers are skilled in their operations
which save production, time and simultaneously encourage new ideas.
AS the size of output increases the firm enjoys automation due to (a)
Specialisation, (b) time-saving (c) automation of the production process
and (d) Cumulative Volume economies
(ii)Technical Economies
Large-scale production is linked to technical economies. When a
firm increases its scale of operations, it needs to use a more specialized
and efficient form of capital equipment and machinery. Such machinery
helps to produce larger outputs at a lower unit cost. Further, as the scale
of production increases and the amount of labour and other factors
becomes larger, the firm manages to reduce costs by introducing a degree
of division of labour and specialization. Technical economies have their
influence on the size of the firm. Generally, these economies accrue to
large firms which enjoy higher efficiency from capital goods or
machinery. Bigger firms having more resources at their disposal are able
to install the most suitable machinery. Therefore, a firm producing on
large scale can enjoy economies by the use of superior techniques.
Technical economies are of three kinds:
(i) Economies of Dimension:
A firm by increasing the scale of production can enjoy the technical
economies. When a firm increases its scale of production, average cost of
production falls but its average return will be more.
(ii) Economies of Linked Process:
A big firm can also enjoy the economies of linked process. A big firm
carries all productive activities. These activities get economies. These
linked activities save time and transport costs to the firm.
(iii) Economies of the Use of By-Products:
All the large sized firms are in a position to use its by-products and
waste-material to produce another material and thus, supplement to their
income. For instance, sugar industries make power, alcohol out of the
molasses.
(iii)Inventory Economies:
Inventory management is typically subject to economies of scale because
manufacturing and distribution tasks involve significant fixed costs. The
difference between goods produced (production) and goods sold (sales) in
a given year is called inventory investment. ... The concept can be applied
to the economy as a whole or to an individual firm, however this concept
is generally applied in macroeconomics (economy as a whole).
2) Marketing economies
They are associated with the selling of the product of the firm. They arise
from advertising economies. Since the advertising expenses increases less
than proportionately with the increase in output, the advertising cost per
unit of the output falls as the output increases. Similarly, other sales
promotion expenditures like samples, salesmen force, etc. also increases
less than proportionately with the output.

3) Managerial Economies

As the output increases, the firm can apply the division of labour to the
management as well. For example, the production manager can look after
production, the sales manager can look after sales, etc. When the scale of
production increases further, the firm divides each department into sub-
departments like sales is divided into advertising, exports, and service.
Thus helps in increasing the efficiency and productivity of the
management team since a specialist manages each sub-department.
Further, the firm has the option to decentralize decision-making authority
enhancing the efficiency further. Therefore, specialized management
allows the firm to reduce managerial costs. However, as the firm
increases its scale of operations beyond a certain limit, the management
finds it difficult to control and coordinate between departments.

4) Transport & Storage Economies

This deals with the characteristic features and effects of economies of
scale in transportation. First of all, a dual division of all the costs is
necessary to clarify the working mechanism of economies of scale in
such a branch of economic activity: 1) costs determined by distance and
costs independent from it. These consist of fixed costs and such variable
costs that depend on the "object" of transport, which in other words
means on the volume of cargo or number of passengers. On the other
hand, 2) there are costs dependent on the transportation object and costs
 independent from it, which consist of fixed cost and variable costs
independent from the volume of cargo or number of passengers, that is--
in other words--variable costs dependent on distance. As the output
increases, the unit cost of transportation of raw materials, intermediate
products and finished products fall. This is because a large firm may be
able to reduce transport cost by having its own transportation means or by
using later vehicles. Similarly, as the size of the firm increases the storage
cost will also fall.
(B) Pecuniary Economies
Pecuniary economies are those economies realised by the firm from paying
lower prize for the factors used in the production and distribution of the product
due to bulk buying by the firm. They accrue to the firm on account of discounts
it can obtain due to its large scale production. They reduce the money costs of
the factors for a particular firm.
The pecuniary economics are realised by a firm in the following ways:
(i)The firm will be able to get raw materials at lower prices due to bulk
buying
(ii) A large Firm can get funds at lower cost, that is, at a lower cost that is
at lower rate of interest due to its reputation in the money market.
(iii) The large firm may be given lower advertising rates if they advertise
in a large scale
(iv)Transport rates may be also low if the amount of commodities
transported are large.
2) External Economics:
External Economics are the economies that originate from factors outside
the organisation. These economies result in the increase in the main
organisation by the increase in the quality of factors outside the organisation
like better transportation, better labour, infrastructure, etc. Due to the
betterment of these external factors, the cost of production per unit of an
item in the organisation decreases.
The important external economies are the following:
1. Cheapening of material and equipment
Expansion of an industry increases the demand for different kinds of
materials and capital equipment’s. This will result in large scale
 production of equipment’s and materials. Large scale production will
decrease their cost of production and so their prices. Therefore the
firms employing them will get them at lower prices.

2. Growth of technical know how

Technical Know-How means all recorded and unrecorded information
and knowledge relating to the design, development of production,
installation and operation of the Product. , it is widely accepted that
technology is the key driver of economic growth of countries, regions
and cities. Technological progress allows for the more efficient
production of more and better goods and services, which is what
prosperity depends on.
3. Development of skilled labour
As the industry grows the training facilities for labour will increase.
This helps the development of skilled labour which will increase the
productivity of workers in the firms.
4. Growth of subsidiary and ancillary
Industries.
Expansion of an industry may facilitate the growth of subsidiary and
ancillary industries to produce tools, equipment’s, machines etc. and
to provide them to the main industry at lower prices.

5. Development of transportation and

marketing facilities
Expansion of an industry may facilitate the development of
transportation and marketing facilities which will reduce the cost of
transportation.
6. Development of information service
External economies also arise from the interchange of technical
information between firms. With the expansion of an industry the
firms may give the information about the technical knowledge through
the publication of trade and technical journals.the firms may also set
up jointly research institutes to develop new improved techniques

The expansion of an industry can likely generate external diseconomies that

increase production cost by increasing the costs of factors such as raw materials
and capital goods, which are in short supply. It may also lead to an increase in
the wages of skilled labour, which is in short supply, and create transportation
bottlenecks. As the industry expands, it may pollute the environment in various
ways and may cause diseconomies in other industries.

Types of Diseconomies of Scale

Similar to the Economies of Scale, Diseconomies of Scale is of two types-
Internal Diseconomies of Scale and External Diseconomies of Scale.
1) Internal Diseconomies of Scale:
Internal Diseconomies of Scale are the Diseconomies resulting from the
internal difficulties within the organisation. The Internal Diseconomies
are the factors which raise the cost of production of an organisation like
lack of supervision, lack of management and technical difficulties.

2) External Diseconomies of Scale:

External Diseconomies of Scale are the external factors which result in
the increase in the production per unit of a product within an
organisation. The external factors that act as a restrain to expansion may
include the cost of production per unit, scarcity of raw materials, and low
availability of skilled labours.