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Economies and Diseconomies of Scale
What are Economies and Diseconomies of Scale?
Last updated date: 22nd Feb 2023 + Total views: 266.4k + Views today: 4.52k
Economies of scale may be defined as the cost advantages that can be achieved by an
organisation by the expansion of their production in the long run. Therefore, the advantages of
large scale expansion are known as Economies of Scale. The lower average cost per unit
achieves the advantage in cost.
Economies of Scale are a long term concept that is achieved when there is an increase in the
sales of an organisation. Due to the lowering of production cost, the organisation can save
more and invest it in buying a bulk of raw materials which can again be obtained at a discount.
These are the benefits of Economies of Scale. When there is a massive expansion in an
organisation, the cost per unit may increase with the increase in output. Diseconomies of Scale
may arise due to intemal issues resulting from technical, organisational, or resource
constraints.
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Types of Economies of Scale
The Economies of Scale may be divided into two categories-
4) Internal Economies
2) External Economies.
Internal Economies: Internal Economies are the real economies that arise from the expansion
of the organisation. These economies are the result of the growth of the organisation itself.Lear UNE Online
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.
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.
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
that raise the cost of production of an organisation like lack of supervision, lack of management
and technical difficulties.
External Diseconomies of Scale: External Diseconomies of Scale are the external factors that
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.
Solved Examples
Q1. What are the Factors which differ between Internal and External Economies of
Scale?
Answer: Economies of Scale are of two types, namely Internal and External Economies of
Scale, Intemal Economies of Scale originate from intemal factors within the organisation. The
Internal Economies of Scale are the internal factors that can be controlled by the organisation
to lower the cost of production.Lear UNE Online
On the other hand, External Economies of Scale are the external factors that affect the cost of
production per unit. The External Economies of Scale are the factors that reduce the cost of
production. Unlike internal Economies of Scale, the External Economies of scale cannot be
controlled by the organisation. They include factors like the availability of highly skilled labour,
tax reductions, partnerships, etc. any factor that can reduce the cost of production per unit.
Examples of Internal Economies
Technical Economies of Scale: This occurs when an organisation invests in modern
technology which helps in lowering the cost of production. It enables an organisation to produce
a large number of goods in a lesser period.
Financial Economies of Scale: This occurs when large organisations take a loan with a low
rate of interest. The banks easily give them loans since they have good credibility.
Managerial Economies of Scale: This occurs when large organisations employ people with a
special skill set that helps to maximize the profits of the organisation like an accountant or
manager.
Marketing Economies of Scale: This occurs when large organisations increase their budget.
They can then spread their market by setting up branches or buying more raw materials in bulk
at a lower price.
Cournot Dilemma
It has also highlighted that in several industrial areas there exist several enterprises with
varying sizes and organizational structures. This conflict, among the actual data and the
conceptual opposition among economies of scale and competitiveness, has been termed the
‘Cournot dilemma’. Whereas the study is expanded, including the issues involving the growth
of information and the structuring of interactions, it is possible to infer that economies of scale
do not necessarily result in dominance. In reality, the comparative benefits resulting from the
growth of the firm's competencies and from the administration of dealings with suppliers and
consumers might offset those supplied by the scale. Thereby it neutralizes the inclination to a
monopoly implicit in economies of scale.Lear UNE Online
In other words, the variability of the organizational forms and of the size of the firms functioning
in a field of business can be decided by variables conceming the reliability of the goods, the
manufacturing flexibility, the contractual methods, the educational opportunities, the
heterogeneity of choices of clients who convey a distinguishable requirement with respect to
the reliability of the product, and aid before and after the sale. Such as, for instance, flexible
production on a large scale, small-scale adaptable production, mass production, industrial
production predicated on strict technologies affiliated with flexible organizational systems and
related artisan production.
Solutions to Diseconomies of Scale
Approaches to the diseconomies of scale for large organizations may entail separating the
corporation into smaller groups. This can either occur by consequence when the firm is in
financial problems, sells off its successful sections, or closes down the remainder. It can also
happen intentionally if the management is willing. To prevent the adverse consequences of
diseconomies of scale, a business must keep to the lowest average production cost. It must
strive to detect any extemal diseconomies of scale. Furthermore, on obtaining the lowest
average cost, a business must either extend to other nations to generate demand for its
products or explore new markets or manufacture new items that do not conflict with its original
products. Nevertheless, neither of these activities would definitely eradicate connectivity and
management challenges commonly associated with huge firms.
A comprehensive examination and redesign of business operations, in order to minimize
complication, can offset diseconomies of scale. This allows for greater productivity. Better
management systems and more effective supervision of labour and activities can decrease
costs.Vedaniti,
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