When a firm moves from small scale to large scale production, the average cost of production of each unit falls. The reasons for which this happens are known as economies of scale – they are the benefits which result in the cost savings of large scale operations which come about when a firm expands. In other words, economies of scale are advantages reaped by firms engaging in large scale production. There are two types of economies of scale. They are:
* Internal economies
* External economies
Internal economies of scale are those benefits experienced within or by an individual firm. They are as follows: Technical economies of scale
* Using equipment to full capacity: large equipment are more efficient than smaller ones as they produce more in less time and therefore at less cost * If the size of a truck doubles, the cost of running the truck does not double, it will remain the same to a great extent * Division of labour increases output
* Increased output results in a reduction in the cost per unit of the product Marketing
This refers to distribution, advertising and other innovations. Larger firms can afford to launch advertising campaigns which will result in an increase in sales for their products and services. They can also afford to establish a complete distribution network to receive credit when necessary. Managerial
This refers to the organisation of work. Specialization normally results from expansion of firms. It improves the efficiency of the staff by increasing the skill and output of specialized workers. Financial
This refers to the accessing of funds for production and expansion purposes. Larger firms can access loans in an easier manner than small firms because they have more collateral, established reputations and can sell shares and debentures.
INTERNAL DISECONOMIES OF SCALE
Technical – larger equipment are more costly to purchase and to maintain. In addition, skilled personnel may not be readily...