Economies and Diseconomies

of Scale
Economies of Scale:

Anything which minimises the average cost of production in the

long run as the scale of output is increased.

Its measured in physical terms

1) Internal Economies
2) External Economies

Internal Economies

The factors, indigenous to the firm makes the cost of production falls.
Its exclusive to the firm and not available to other firms

a)

Labour Economies
In long run specialisation of labour leads to increase in efficiency
which leads to increased productivity and lower cost of production.

b)

Technological Economies
In the long run more efficient and advanced technology can be used
for large scale production which can also be used for composite
production processes.

c)

Managerial Economies
Reduction in managerial cost as with large scale production
specialist managerial staff can be placed to perform the managerial
functions.

Internal Economies
d)

Marketing Economies
The buying of inputs (raw material) and selling (goods
produced) can be done more efficiently and effectively by
large firms doing large scale production.

e)

Financial Economies
The cost of obtaining credit and capital is lower to a large
firms and big firms are regarded as less risky.

f)

Risk minimising Economies

Large firms divide risk by diversification. It helps to offset
losses by making profits in certain line of business.

External Economies

They are external to the firms

Such economies are available to all firms / Industry

a)

Economies of concentration
When all firms mutual advantages of facilities labour,
transport, banking and financial services, infrastructure, etc . It
leads to reduction in operational cost.

b)

Economies of Information and Marketing Intelligence

Established Industry can bring about trade and technical
publications which is accessible to all firms.

c)

Economies of Specialisation
Firm level specialisation leads to increase the productivity of the
firm. Each stage can be disintegrated and specialised which can
lead to better production.

Diseconomies of Scale
Diseconomies of scale:
When a firm expands beyond a optimum level.
The average cost rises and leads to diseconomies
1.
2.
3.
4.
5.
6.
7.
8.

Difficulties of management
Difficulties of Co-ordination
Decision making
Increased risk
Labour Diseconomies
Scarcity of factor supplies
Financial difficulties
Marketing Diseconomies

Economies of Scope
Cost effective for a single firm to produce more than one
product than for separate firms to produce an equal
quantity of output of the same product.
1)
2)

In case of a firm produces several products: common

production facilities and inputs
Production of one good results in by-products that can also
be sold by producers.

Economies of Scope
Degree of economies of scope =
TC (Q1) + TC (Q2) TC (Q1 + Q2)
TC (Q1 + Q2)
TC (Q1) = Total cost of production Q1 units of good 1
TC (Q2) = Total cost of production Q2 units of good 2
TC (Q1 + Q2) = Total cost of producing goods 1 and 2 jointly

If Degree of Economies of Scope

Positive: Economies of Scope exist. Producing goods
jointly is cheaper
Negative: Producing goods separately is cheaper