Internal economies of scale -- Savings in cost as ﬁrm expands. Created by ﬁrms’ own policies and actions. All must link back to lowering AC
1. Technical Economies of scale (Technical and engineering factors) • Factor indivisibility Economies • Make full use of large equipments • Economies arising from increased dimensions • Larger dimensions. Container principle>>Doubling of area more than doubles the volume • linked process economies • Takes a product through several stages of production, saves transport cost • Specialisation and division of labour • less training, more efﬁcient • by product economies • waste of one = input of another 2. managerial economies of scale • expertise of professionals streamlines the work processes. • division of work increases experience within their own area • decentralisation of decision making saves time. 3. marketing economies • buy materials in bulk, saves unit cost of transportation. • dictate their price, quality and delivery. • large scale advertising, cost spread over larger volume of sales. 4. ﬁnancial economies • more collateral, obtain larger loans at lower interest rates • raise capital through issuing bonds and share to the public and public have more conﬁdence in large ﬁrms 5. risk bearing SEA HIST • advantage in bearing non insurable rise through diversifying their output or develop new markets • supply side >> obtain different sources to guard against crop failures for instance. 6. RnD economies • RnD involve high initial capital outlay. The cost can be spread over larger output if ﬁrms expand. • Improve in techniques, lowers AC
7. Welfare Economies • larger ﬁrms able to improve workplace environment to encourage higher productivity. which is a rise in output per worker which leads to lower unit of cost of production. 8. economies of scope • per unit COP fall over an increased range of products as overhead costs are shared among products. Internal diseconomies of scale 1. Complexity of management • principle agent problem >> ownership and management become more divorced. • bad coordination between entrepreneurs and managers. • large ﬁrms have extensive red tape slows down decision making process 2. strained relationship • worker lack loyalty to the ﬁrm >> sloppy attitude and work. lower productivity and increase AC External economies of scale >> Lower AC due to increase in size of industry or concentration of ﬁrms in one location. Shift down LRAC 1. economies of concentration --- when ﬁrms concentration in one area • availability of skilled labour • demand for a particular type of skill is large enough, special educational institutions can be set to train people in such skills. • Firms can join together to develop such institutions • reduce cost of training workers • well developed infrastructure • roads, airports, public utilities also set up to cater to the industries. • reduce AC of individual ﬁrms. • reputation • builds up reputation and consumers associate it with quality. encourages brand loyalty and saves money on advertising. 2. economies of disintegration b. subsidiary industries will be developed to cater to needs of major industry. Lower AC. ii. producing input for larger industry. iii. process waste products for larger industry >> who sell it at a proﬁt 3. economies of information b. save on RnD. increase productivity of individual ﬁrms. External diseconomies of scale
1. Increased strain on infrastructure a. concentration of ﬁrms in a geographical region taxes infrastructural heavily. i. trafﬁc congestion increase AC of transport >> time and fuel consumption 2. Rising factor costs a. shortage of raw material and ﬁrms have to compete for them. DD rise, P rise. Minimum efﬁcient scale varies with different ﬁrms. Methods of growth 1. growth by internal expansion a. increase number of existing product or extending range of its product with bigger plant 2. growth by merger or acquisition a. vertical integration i. backward >> ﬁrm merges with previous stage of...
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