ECONOMIES OF SCALE

Economies of scale are referred to as

advantages of large scale production.
They may be defined as reduction in
the firm’s per unit costs associated
with the use of large plants to
produce large volume of output.

Economies of scale are distinguished

into-
1. Real Economies.
2.Pecuniary Economies.
 Real Economies

Real economies are associated with a

reduction in the physical inputs, raw
materials, various types of labor and
capital. It is again classified into-

1.Production Economies
2. Selling and Market Economies
3.Managerial Economies
4. Transport Economies
 Production Economies
Production economies of scale arise from
the factor labor(labor economies), fixed
capital or from the inventory requirement
of the firm.

* Labor economies are achieved as output

increases for several reasons like
specialization, time saving, Automation of
production process etc.
Selling or Marketing Economies

Selling economies types are like advertising economies, other large scale
economies, economies from special arrangements with exclusive dealers etc.

*. Advertising economies- Advertising cost per unit of output fall , advertising

space and time increase less than propotionately.

Managerial Economies

It arises for reasons like:-

* Specialization of management:- division of managerial tasks like production

manager, sales, finance and personnel manager etc. It helps in increasing
efficiency of management, the flow, distortions and delays in information
reduced and quick in decision making.

*Mechanization of managerial functions:- Large firms uses high degree of

mechanization like telephones, telex machines , TV screens and computers. It
saves time in decision making process.
 Transport and Storage Economies

*Transportation cost arise partly on both production

side(raw materials) and selling side(final products to
market).

* storage costs fall with size. Storing capacity can be

increased by increasing the number of floors of
storehouse.

* Uses of firms own transport means unit costs would

fall up to their full capacity .If firm uses the public
transport the unit costs increases with the distance.
 Pecuniary Economies

It arises from paying lower prices for the factors

employed in the production and distribution of the
product due to bulk buying.

It can be classified as follows:-

(a) Lower prices for bulk buying of raw materials.

(b) Lower interest rates.
(c) Lower wages and salaries.
(d) Lower transport rates.
(e) Lower costs of advertising.
 Diseconomies of Scale
Large scale of operations has optimum capacity and increase in
the scale beyond this level leads to diseconomies of scale.

If the firm or industry expands beyond a limit it is likely to

experience the following situations.

*Failure on the part of management to co-ordinate, supervise

and control the business leading to increase in per unit cost of
production.

*Employees may not work efficiently.

*Wastage of resources.

* Difficulties with regard to decision making