Economies and Diseconomies of

Scale
 CONTENTS
• Economies of Scale

• Diseconomies of Scale
 OBJECTIVES

• To identify different types of economies of scale and

diseconomies of scale and understand its concept

• To apply these concepts in the real life scenario

 Economies of Scale

Economies of scale are cost advantages companies

experience when production becomes efficient, as
costs can be spread over a larger amount of goods.
 Economies of Scale

• These are cost advantages reaped by companies when

production becomes efficient.
• Companies can achieve economies of scale by
increasing production and lowering costs.
• This happens because costs are spread over a larger
number of goods.
There are two types of economies of scale:

•Internal Economies of scale

•External Economies of Scale

 Internal Economies of Scale

Economies that a firm achieves due to the growth of the

firm itself.

•Open to a single firm independent of action of other firms.

•Result from an increase in the scale of output of the firm.

 Types of Internal Economies

•Technological Economies
•Bulk-buying Economies
•Marketing Economies
•Inventory Economies
•Managerial Economies
•Financial Economies
 Example of Internal Economies

• Discounts on bulk purchases of raw materials needed to

create a company's products.

• Investments in technology that, over time, pay for

themselves by improving a company's rate and cost of
production
Avenue supermarket and Walmart, two of the biggest retail markets sell
their products with the lowest price in the market and still manage to
make profits.

Crompton ltd. Installed a new technology which is costly but will

drastically improve the quality of the product and will also increase the
speed of producing goods and can help in reducing the cost.

Vipul Thakur, the chairman of the People’s bank implemented the

automation process and has helped bank go ahead of the competition by
automating many manual processes which boost up their customer morale
and also employee morale.
 External Economies:

Economies in production that a firm achieves due

to the growth of the overall industry in which the
firm operates.

•Common to all firms in an industry.

•Not related to an individual’s firm own cost

reduction efforts.
 Types of External Economies

•Economies of Localisation: India’s first Semiconductor Production

Plant in Gujarat; Samsung’s Largest Mobile Factory in Noida

•Economies of Information: Auto Magazine, IT Bulletins

•Economies of Disintegration: As the industry develops, all the

firms engaged in it decide to divide and sub-divide the
process. For instance, in case of moped industry, some firms
specialize in rims, hubs and still others in chains, pedals,
tyres etc.
 Examples of External Economies

• New production methods.

• Transportation modes.

• Government tax breaks.

• Increased tariffs against a foreign competitor.

 Diseconomies of Scale

Diseconomies of scale refer to the disadvantages that

arise due to the expansion of a firm’s capacity leading
to a rise in the average cost of production.

•There is a point of Optimum Capacity for all the

firms.

•The scale of production can not be expanded

indefinitely.
 Internal Diseconomies

These refer to the diseconomies that a firm incurs

due to the growth of the firm itself.

•Inefficient Management
•Labour Inefficiencies
•Technical difficulties
•Financial Diseconomies
•Production Diseconomies
 Examples of Internal Diseconomies

• Poor Communication

• Inefficient Management

• Low Motivation Level

• Higher Costs of Resources

• Greater Levels of debt and interest

 External Diseconomies

External diseconomies of scale refer to the

disadvantages that arise due to an increase in the
number of firms in an industry leading to over
production.

•Diseconomies of Pollution

•Diseconomies of Infrastructure

•Diseconomies of High Factor Price

Examples of External Diseconomies

• Taxes

• Regulations

• Resource constraints
Internal or External
Mr. Jones owns several bakeries. He hires 5 employees in each of his 10
stores so he now has an additional 50 employees. On his own, it is
incredibly difficult to manage and plan the schedules, wages, and other
factors for these new workers. In turn, he may have to hire additional
managers, accountants, and lawyers, thereby adding to costs.

The employees get stuck in traffic or suffer from train delays because of
poor infrastructure. This may result in staff being late, stressed, and
therefore, unproductive.

Several factories may open in close proximity to each other in order to

benefit from efficiencies. This may come from knowledge efficiencies,
supplier efficiencies, or other such efficiencies. As a result, such factories
may create additional costs in the form of pollution to its local
surroundings.
Thank You