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As a firm grows in size, it is possible for it to reduce its costs. The reduction in costs, as a result of increasing production, is called economies of large scale production. The economies of large scale production are obtained by the firm up to the lowest point on the firms long run average cost curve.


The economies of large scale production are classified into two types by Marshall:

(1) Internal Economies and (2) External Economies.

(1) Internal Economies of Scale:


Internal economies of scale are those economies which are internal to the firm. These arise within the firm as a result of increasing the scale of output of the firm. A firm secures these economies from the growth of the firm independently.


The main internal economies of scale are grouped under the following heads:

(i) Technical Economies: When production is carried on a large scale, a firm can afford to install, up-to-date, and costly machinery and can have its own repairing arrangements. As the cost of machinery will be spread over a very large volume of output, the cost of production per unit will therefore, be low.

A large establishment can utilize its by products. This will further enable the firm to lower the price per unit of the main product. A large firm can also secure the services of experienced entrepreneurs and workers which a small firm cannot afford. In a large establishment there is much scope for specialization of work, so the division of labor can be easily secured.

(ii) Managerial Economies: When production is carried on large scale, the task of manager can be split up into different departments and each department can be placed under the supervision of a specialist of that branch. The difficult task can be taken up by the entrepreneur himself. Due to these functional specialization, the total return can be increased at a lower cost.

(iii) Marketing Economies: Marketing economies refer to those economies which a firm can secure from the purchase or sale of the commodities. A large establishment is in a better position to buy the raw material at a cheaper rate because it can buy that commodities on a large scale. At the time of selling the produced goods, the firm can secure better rates by effectively advertising in the newspapers, journals and radio, etc.

(iv) Financial Economies: Financial economies arise from the fact that a big establishment can raise loans at a lower rate of interest than a small establishment which enjoys little reputation in the capital market.

(v) Risk Bearing Economies: A big firm can undertake risk bearing economies by spreading the risk. In certain cases the risk is eliminated altogether. A big establishment produces a variety of goods in order to cater the needs of different tastes of people. If the demand for a certain type of commodities slackens, it is counter balanced by the increase in demand of the other type of commodities produced by the firm.

(2) External Economies of Scale:


External economies of scale are those economies which are not specially availed by any firm. Rather these accrue to all the firms in an industry as the industry expands.


The main types of external economies are as under:

(i) Economies of localization: When an industry is concentrated in a particular area, all the firms situated in that locality avail of some common economies such as (a) skilled labor, (b) transportation facilities, (c) post and telegraph facilities, (d) banking and insurance facilities etc.

(ii) Economies of Vertical Disintegration: The economies of vertical disintegration implies the splitting up the production process in such a manner that some job are assigned to specialized firms. For example, when an industry expands, the repair work of the various parts of the machinery is taken up by the various firms specialists in repairs.

(iii) Economies of Information: As the industry expands it can set up research institutes. The research institutes provide market information, technical information, etc., for the benefit of the firms in the industry.

(iv) Economies of by Products: All the firms can lower the costs of production by making use of waste materials.