Large scale production has several economies. These arise within the firm as a result of increasing the scale of output of the firm. Managerial Economies of Scale Managerial economies of scale are similar to workforce specialization. Also, managerial economies of scale are efficient in terms of hiring new employees, because of the human capital management. Marshall argued that significant external variable developments can be substantially impactful for economies of scale leading to extreme changes in cost structures and for the economy at large.
If the firm is a perfect competitor in all input markets, and thus the per-unit prices of all its inputs are unaffected by how much of the inputs the firm purchases, then it can be shown that at a particular level of output, the firm has economies of scale if and only if it has increasing returns to scale, has diseconomies of scale if and only if it has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has constant returns to scale. Such specialization helps the firm in expanding the output and reducing the cost of production. Specialization: Large-scale firms divide various production stages into smaller portions that can be easily managed. Similarly, the use of computer is economical only for large undertakings. These economies are of the following types: 1. They can easily invest money in new projects, introduce new products, open new market etc.
As the size of plant increases, the management loses control over the productive activities. Generally expansion in the size of firms leads to the expansion of industry and creation of external economies of scale. The main external economies are as under: i Economies of localization. Economies of scale can be internal or external. Whether there are opportunities for a more efficient industry structure through different types of restructuring Does size matter? The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. When demand for its products increase, the same machinery can be used for producing more output. A large firm can enjoy the benefit from backward as well as forward integration of processes.
This spillover effect can lead to the creation of standards within an industry. Or, they can pass the savings to consumers and compete on price. Such opportunities are not available to small firms. They can result from a variety of changes such as a reduction in the cost of goods used, new capital infrastructure investments or improvements on a business-specific level. Thus a large firm can get economies due to increased dimensions 10. It is in this way that a large firm reaps financial economies. Large firms are more exposed to the risks than the smaller ones due to the lack of liquidity.
In this case, with in the output market the long-run equilibrium will involve all firms operating at the minimum point of their long-run average cost curves i. In case of horizontal disintegration each firm in the industry tries to specialize in one particular item whereas, under vertical disintegration every firm endeavors to specialize in different types of items. In a large firm, in order to ensure the carrying out of the policies, rules and regulations are necessary and must be strictly adhered to. It also enjoys prompt delivery, careful attention and considerate treatment from all intermediaries. An error of judgment on the part of the sales manager or the production manager may adversely affect sales or production which may lead to great loss. Due to these functional specializations, the total return can be increased at a lower cost. It then passes the savings onto you.
Internal economies are of several types. The tasks could then be performed better and faster. The firm can avoid purchase of raw materials and other inputs from outside suppliers for obtaining packaging materials like boxes, labels, etc. Thus specialisation will lead to greater productive efficiency and to reduction in costs. For example, doubling of coal mining plants will not double the coal output due to limited availability of coal deposits. Larger businesses have the opportunity to raise financial capital through issuing stock on the open market and selling bonds at favorable interest rates.
Economics of scale can be internal to an organization or external. Economy of materials: A large firm can utilize its materials by producing in an economical manner. A large scale production unit is no longer a single family or small group of persons working with few cheap, simple tools or small quantities of raw material, but a compact and closely organised mass labour composed of thousands of individuals, cooperating with large quantities of expensive and intricate machinery through which pass a continuous and mighty volume of raw material on its journey to the hands of the consuming public. External Diseconomies: A firm or an industry cannot avail of economies for an indefinite period of time. Though the expenses on such facilities are very heavy, yet they tend to increase the productive efficiency of the workers which helps in raising production and reducing costs.
In contrast, smaller firms often face higher rates of interest on overdrafts and loans. Mass production methods like the assembly line in the motor car industry are available only, when the level of output is very large. Diseconomies of scale can occur externally and internally. They are in less than optimum proportions with the variable factors. The effect of economies of scale is to reduce the average unit costs of production. The selling firms reduce their costs of production by realizing something for their wastes.
Economies and diseconomies of scale in the water industry: In January 2004, Ofwat, the government's regulatory agency for the water and sewage disposal industries, published a report entitled 'investigation into evidence for economies of scale in the water and sewerage industry in England and Wales'. That is why they are also called Economies of Scale. Large-scale buying, or purchasing items in bulk, reduces costs by giving the business greater power to negotiate lower prices and bulk pricing discounts. Generally, these economies accrue due to the expansion of industry and other facilities expanded by the Government. The literature assumed that due to the competitive nature of , and in order to compensate for lower prices and lower margins, suppliers seek higher volumes to maintain or increase the total revenue.