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-Economies of scale are the cost advantages that a

business obtains due to expansion. They are factors
resulting into producer͛s average cost per unit to fall as
the size of a facility or scale increases
- Economies of scale refers to the efficiency gained in
production process as the rate of production is increased.
By sharing the cost of production; operating costs, and
cost per unit produced; are decreased over time


-Division of labor & Specialisation: Job with limited scope improves

efficiency e.g. assembly line
-Capacity & Fixed Costs: There is economy of scale in higher quantum of
production levels in operations having large amount of *fixed costs e.g. ?
-Bulk Purchases: Buying in bulk help reduces procurement costs how ?
-Common Overheads: Mergers of same business helps in reducing costs,
-Marketing: Large scale can afford higher marketing/advertising costs
*Container principle: Capacity can be increased 8 times by increasing
surface area only 4 times


-Internal: The cost per unit depends on size and factors

specific to individual firms

-External: The cost per unit depends on the size/factors

pertaining to the industry, not the firm examples ?


[nswer may be Yes and No

If answer is no, it is known as DISECONOMY OF SC[LE



-It is opposite of an economy of scale.

-In diseconomy of scale long run average cost per unit

rises with an increase in output

Why ?


-Higher management cost for larger organisation: Difficult

to monitor more people, expensive and ineffective communication
channels, less commitment of people, fall in service quality, etc.

-Larger the size, more may be pressure on availability of

labor and material increasing input costs

-Tighter regulations for large size or non availability of

certain promotional exemptions e.g. for SSIs



Economies of Scale for all sizes/volumes/outputs !

- Such firm, enjoying economies of scale for all reasonable

sizes; because it is always efficient for one firm to expand
than for new firms to be established, are know as a
They have significant market powers thus need to be regulated or public owned.
Examples ?



-[s firms gain experience in the production of a

commodity or service, their average cost of production
usually declines

-The learning curve shows the decline in the average

input cost with rising cumulative total outputs over a
period of time.

For example, it might take 1000 hours to assemble the 100th aircraft, but only 700
hours to assemble the 200th aircraft because managers and workers become more
efficient as they gain production experience.


     ! ‰  

-Firms look around at global level to reduce input costs to

remain competitive
-Out sourcing business process to take advantage of
cheap labor in other countries, locating production
facilities in areas of cheaper inputs e.g. raw material,
labor, regulations e.g. ?
-Firms normally retain components/product which are
indispensable for their competitive position, rest all try to

     ! ‰  

Can be achieved in 5 basic areas:

(i)Product Designing/Development (contract R & D by pharma. firms)
(ii)Purchasing (raw material, parts, components)
(iii)Production (in low cost areas, assembly near actual market, Sony)
(iv)Demand management (Demand forecasting country/region wise)
(v)Order Fulfillment (order fulfillment from plants located near actual
markets to avoid large inventories, shipment cost, etc)

   refers to the lowering of costs that
firm often experiences when it produces two or more
products together rather than each alone e.g. airline
commencing cargo service, using a byproduct to produce a new product, engine lie-
over in Rlys.

- Management must be alert to the possibility of

profitability extending its product line to exploit such
economies of scope