Name: Aanchal Bathija Class: F.Y.BFM Roll no.

: 2 Subject: Economics

Question: State the economies and diseconomies of scale of production.

Economies of Scale
The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods. There are two types of economies of scale: -External economies - the cost per unit depends on the size of the industry, not the firm. -Internal economies - the cost per unit depends on size of the individual firm.

The various internal economies:

Labour economies:
It refers to the benefits got due to division of labour. When the scale of operation of a firm expands, its division of labour also expands. Division of work results in specialization and gives the worker the skill that make him an expert in doing the work that he does. Due to all this the productivity increases. Division of labour saves time and improves the innovation of the skills of the labourers. However, division of work is good but to a limited extent, if overdone it increases the cost of production. Division of work also is possible well only in large scale productions.

Managerial economics:
These are benefits a firm enjoys due to the specialization in managerial functions. When a firm expands the work is divided into various

functions and the no important tasks can be handled by the juniors and thus the more significant work can be taken care of by the heads. All this cannot be done in a small firm. Only large firms enjoy this managerial economics.

Technical economics:
Various factors contribute to the technical economics: y Some factors like machines are indivisible, so to use them completely a certain level of output needs to be produced. Thus more the production, better is the use. y A larger firm can afford better type and quality of factors of production. A smaller firm cannot even think of the type of techniques the larger firms actually use. y Some machines and equipments ar usually on the upperend just because of their size. For e.g.: huge ships, big trucks, are all using the same amount if manpower but higher output and production. Thus, they are beneficial. y Large scale firms also make use of power more efficiently. y Waste products are also often used in the production of a number of by-products. This is very commonly seen in sugar and chemical industries. y They can also enjoy the benefits of having continuous production. This is very often seen in the business of printing press. This is because the cost of composing is almost constant and the printing cost also rarely hardly changes.

Marketing economics:

These are the benefits got while buying and selling the products. They get inputs on a lesser cost. This is because they have a larger bargaining power. This they get because of their large scale production. They also enjoy a number of advantages when it comes to selling the output. This is because they can economise the various costs like transport, administration, advertising etc.

Financial economics:
Large business firms also get finance easily. This is because they have their own reputation and influence over the financial institutions. Big firms are considered less risky and thus they readily give financial help to them. They can also raise their own capital. They not only get adequate capital but also at a lower interest rate.

Economies of integration:
Large scale economies reduce the cost of production by integration the successive processes of a production. For example: the iron and steel firm. All the processes, right from melting the iron to molding it into various shapes and forms can be done in the same premises. This leads to greater efficiency and lower costs.

The various external economies of scale:

Localization economies:

This refers to the concentration of the firms in a particular area. When several firms of an industry are localized then they all get certain benefits and advantages from each other. They share various facilities like transport, infrastructure, maintenance, etc. there can also be mutual exchange of skilled labour, lab facilities, research and studies etc. All these help to reduce the cost of production. Research and Information economies: When an industry expands it invests in research work. Instead if each firm doing its own research work independently, if all the firms are localized, they can share the information and findings of the industry and reduce the cost of their own firm, which is ultimately beneficial for the entire industry. Disintegration economies: This implies that a growing industry can split up its operations and can get it done through subsidiaries. The firm which does the operations will get the benefits only at a large scale. Ultimately the entire industry benefits due to the overall reduced cost.

Diseconomies of scale
An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing

continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

y When an organization increases in size, the entrepreneur does not have total effective control over the organization. Thus there are problems in coordination, supervision and management leading to wastage of resources and higher cost of production. y In the course of expansion, many people might have been employed. The firm now has excessive working force. Thus, it has higher cost of production. y If a firm expands beyond its limits, there can also be a problem of delays in decision making and actions to be taken. This is because a lot of people have to be consulted and it takes time to arrive at a conclusion. y Financial constrains, infrastructural bottlenecks, scarcity of raw materials may be faced by firms and industries when there is too much of expansion. All these severely affect the profitability of the firm and industry.

y When all the firms in an industry expand, there will be huge competition among them. To win in the market they all will compete with one another in terms of promotions, advertisements, innovations and thus may increase their individual costs. All these may increase the cost of the entire industry. Thus, the size of a firm or industry is limited by diseconomies of scale.

Question: Explain international economies of scale and outsourcing of inputs as a strategy adopted by many firms.

International Economies of Scale

The international trade has been on the rise, all business firms are facing competition, and there is increase in the level and standard of overseas business. All this and also one more strategy of outsourcing of inputs and overseas production. A large number of MNCs buy inputs from a number of countries abroad and also establish production facilities.

All this is basically done to reduce the cost of production. Outsourcing has become indispensable for many firms simply to remain in competition. Firms which are not using this option become unviable not only in the international market but even in the domestic market. This process of procuring inputs from other countries and operations from other nations is termed as international economies of scale.

Outsourcing

By using outsourcing as a strategy the firms try to achieve the international economies of scale namely through designing the product, production, purchasing, management of demand and fulfillment of

orders. While designing the product many firms take into account the local requirements etc. As far as the production is concerned, major parts of the production can be done at a low cost, leaving the final assembly near the local markets. While purchasing raw materials and intermediary products, the firms should access the global markets, rather than local markets.

Demand forecasting can be used by the firms to have effective global demand management. Better economies of scale can be achieved by the firms by supplying goods from the plants close to the final consumers and by maintaining low inventory.

Thus, international economies play an important role in todays global economic order.