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Internal economies of scaleThe internal economies of scale are the advantages to the firm from large-scale

production.

Such economies can be classified along the following lines:

Technical economies of scale:A large firm can justify the purchase of the most

technically advanced machines because it can spread the cost of such equipment

over a large quantity of output. The output of small firms would not make the

purchase of such machines worthwhile.

Construction economies:Building costs do not increase in proportion to the size of

the firm. A simple example will illustrate this.

Economies in the use of labour: A large firm is more likely to be able to engage in

specialisation and division of labour. Each worker can concentrate on a specific task

at which he/she becomes very skilled. Therefore output per worker is increased,

and the cost per unit output is reduced.

Production economies: Large firms can keep the production process continuos.

Operating three 8-hour shifts so that output is produced 24 hours a day does this.

This results in no waiting time for machines to heat up etc.

A large firm can reduce cost per unit by involving itself at more than one stage in

the production process: For example a large supermarket may have an in-store

bakery, enabling it to sell bread more cheaply than its rivals e.g. a small family-run

grocery shop would not find this practice worthwhile.

Economies in the use of raw materials: The larger the firm, the more likely it is to

be producing a wide range of goods. It is therefore less likely to have waste; sinceleft over raw materials may be used in producing related products.

Financial economies: A large firm has a greater source of finance than a small firm

does. This could mean that they could borrow at lower rates of interest as it is

seen as more secure by the banks.

Purchasing economies: Large firms are more likely to secure favourable trading


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terms (i.e. discounts) because they buy in bulk.

Economies in distribution: A firm with a high volume of sales can organise a more

efficient transport and distribution system than a small firm with only a few

deliveries to make.

Advertising economies: Advertising costs per unit of output are lower for a largefirm. E.g. a 10,000 ad by Guinness would only cost 1p per pint if the daily sales of

Guinness were 1 million pints. A similar ad by Bulmers would cost 10p per pint if the

daily sales were 100,000 pints.

Internal diseconomies of scaleInternal diseconomies of scale are the disadvantages within the firm of large-scale

production.

Such economies can be classified along the following lines:

Managerial diseconomies: The bigger the firm the more difficult it is to mange.

Even in a very large firm the decision-making is done by a relatively small group of

people. It is more difficult in a large firm for such a group to gather together all

the information necessary to make the correct decisions. Also problems may arise

in the communication of information from management to worker.

As a firm expands, the interests of workers and management may conflict, and

industrial relations problems could result: Workers may see themselves as merelycogs in the wheel of production. Workers morale may suffer as a result, leading to

absenteeism and an increase in costs within the company.

A large firm is usually characterised by a high degree of specialisation of labour.

While this leads too increased output, there are possible disadvantages: Workers

can become bored with constant repetition of the some tasks and the quality may

suffer. Also workers may not be open to new work practices if they have been

trained to perform only a few tasks.

In a large firm there tends to be a higher proportion of non-productive workers:

More foremen and supervisors are required, as well as personnel officers, clerical

staff, etc.

A large form may be more exposed to unreasonable demands by workers: Workers

may feel that, because of its size, the firm can more easily give in to their

demands.


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External economies of scaleThese are the advantages of large scale production which are common to all firms

in the industry.

External economies of scale can be classified as follows:

Economies in the supply of component parts:As an industry expands, other firms

may be established to supply it with component parts. E.g. the growth of motoring

as a major industry has been accompanied in many centres by the setting up of

firms supplying component parts or related products such as: paint, tyres,

batteries and upholstery.

As an industry expands, it may become worthwhile for firms to be established to

supplyspecialised equipment to be used in the production of goods and services.As an industry expands, local educational institutions may provide training courses

for workers to develop skills related to that industry.

Marketing agencies may be established to sell the increased output produced as

the industry expands. Also technical information and market trends may become

available through a trade association. Such an association may undertake activities

(such as trade fairs) outside the scope of the individual firm.

The costs of product design, research n the introduction of new technology may be

shared by firms as the industry expands: For example: car design is an expensive

process. A number of firms may share the cost and each firm will be able to usethe design produced. E.g. Ford, Volkswagen & Seat and the Galaxy design.

As the economy expands, the back-up facilities available to firms improve:Better

roads, railways, ports, communications, etc., are provided. Such improved facilities

confer benefits on already established firm

External diseconomies of scaleExternal diseconomies are the disadvantages of large-scale production common toall firms in the industry.

External economies of scale can be classified as follows:


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As the industry expands, the amount of raw materials required by firms increases.

This can have 2 negative effects. Firstly, the cost of raw materials will rise because

of increased demand. Secondly, poorer quality materials may have to be used

A similar problem can arise in the case of labour. As the industry expands, more

labour is required. Skilled labour may be in short supply, so that the wage rate isforced up. Alternatively, the firm may be forced to employ less skilled workers. In

either case, costs will rise.

As industry expands, greater demands are made on a countrys infrastructure. The

existing infrastructure may be inadequate to cope with demands of expanding

industries. Roads, harbours and airports may be too small to serve the growing

needs of industry.

SummarySummary of internal economies and diseconomies of scale

Economies Diseconomies

1. Technical2. Construction3. Labour4. Continuous production5. Integrated production6. Raw materials7. Financial8. Purchasing9. Distribution10.Advertising

1. Management problem2. Worker / management conflict3. Worker boredom4. More non-productive workers5. More open to unreasonable

demands by workers

Summary of external economies and diseconomies of scale

Economies Diseconomies

1. Supply of component parts2.

Supply of specialisedequipment

3. Training courses4. Marketing Agencies5. Sharing of research costs6. Improves infrastructure.

1. Scarcity of raw materials2.

Scarcity of skilled labour

3. Inadequate


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