Economics of
Large Scale Production:
Classifications/Types and Explanation:
The economies of large scale
production are classified by Marshall into:
(1) Internal Economies and (2)
External Economies.
(1) Internal
Economies of Scale:
Definition and Types:
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 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 a
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.
(vi)
Economies of Scale:
As a firm grows in size, it
is-possible for it to reduce its cost. The reduction in
costs, as a result of increasing production is called economies
of scale. The economies of scale are obtained by the firm up to
the lowest point on the firms long run average cost curve. The
main sources of economies of scale are in brief as under.:
Diseconomies
of Scale:
Definition:
The extensive use of machinery,
division of labor, increased specialization and larger plant
size etc., no doubt entail lower cost per unit of output but the
fall in cost per unit is up to a certain limit. As the firm goes
beyond the optimum size, the efficiency of the firm begins to
decline. The average cost of production begins to rise.
Factors of Diseconomies:
The main factors causing
diseconomies of scale and eventually leading to higher
per units cost are as follows:
(i)
Lack of co-ordination.
As a firm becomes large scale producer, it faces
difficulty in coordinating the
various departments of production. The lack of co-ordination in
the production, planning, marketing personnel, account, etc.,
lowers efficiency of the factors of production. The average cost
of production begins to rise.
(ii) Loose control. As the
size of plant increases, the management loses control over the
productive activities. The misuse of delegation of authority,
the redtapisim bring diseconomies and lead to higher average
cost of production.
(iii) Lack of proper
communication. The lack of proper communication between top
management and the supervisory staff and little feed back from
subordinate staff causes diseconomies of scale and results in
the average cost to go up.
(iv) Lack of identification.
In a large organizational structure, there is no close liaison
between the top management and the thousands of workers employed
in the firm. The lack of identification of interest with the
firm results in the
per unit cost to go up.
(2) External
Economies of Scale:
Definition and Types:
External economies of scale are those
economies which are not specially availed of by .any firm.
Rather these accrue to all the firms in an industry as the
industry expands. The main 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 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 alt 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.
External
Diseconomies:
Definition:
A firm or an industry cannot avail
of economies for an indefinite period of time. With the
expansion and growth of an industry, certain disadvantage also
begin to arise. The diseconomies of large scale production are:
(i) Diseconomies of pollution, (ii)
Excessive pressure on transport facilities, (iii) Rise in the
prices of the factors of production, (iv) Scarcity of funds, (v)
Marketing problems of the products, (iv) Increase in risks.
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