Scale of Production, Internal and External Economies Diseconomies of scale

CONTENT

• Meaning of Scale of Production
  • Types (Small, Medium and Large)
  • Internal and External Economies of Scale
  • Internal and External Diseconomies of Scale

SCALE OF PRODUCTION:  simply means the size of a firm’s productive capacity. It is also called economies of scale. The major aim of setting up a firm is to make profit at the lowest possible cost. It also refers to the size of operation adopted by a firm.

Scale of production can be:

1. Small.
2. Medium.
3. Large.

SMALL AND LARGE SCALE OF PRODUCTION

 One man business is usually a small business while the corporation or joint stock companies, on the other hand, are usually large scale operations . Small firms sometimes have no intention of changing their sizes.The major characteristics that differentiates a small firm from a large one is tabulated below :

Characteristics	Small firms	Large firms
Employment	Have few workers	Have large workers e.g. Experts
Capital	only small Capital	Require large capital
Market	Have small markets subject to changes in demand.	Have extensive market where demand is high
Product or service	Produce flexible product design and can provide personal attention to customers	Practice standardization of products with no personal attention to individuals
Technique of Production	Employ simple techniques	Use techniques requiring heavy equipment
Economies of scale	Cannot easily take advantage of economies of scale	Can benefit from both internal and external economies of scale
Research and Publicity	May not have resources for research and advertisement	Undertake expensive research which permits further expansion

ECONOMIES OF SCALE 

By economies of scale, we refer to the growth of a firm or an industry resulting from expansion of the scale of productive capacity which leads to increase in output and decrease in the cost of production per unit of output. The two types are;

1. internal economies and diseconomies
2. external economies and Diseconomies

EVALUATION

1. What is economies of scale?

2. Differentiate between small scale and large scale.

INTERNAL ECONOMIES AND DISECONOMIES

These are the advantages a firm derives from the expansion of its scale of production as a result of its own single efforts .As the size of the firm increases, there will be greater efficiency resulting in the fall per unit cost of output. This is also known as economies of large scale of production.

On the other hand, when the firm’s expansion leads to less efficiency and increase in the cost per unit of output, then the firm is suffering from internal diseconomies.

INTERNAL ECONOMIES OF SCALE OR  THE ADVANTAGES A LARGE FIRM HAS OVER SMALL FIRMS.

1. Technical / Technological Economies
2. Financial Economies
3. Marketing Economies
4. Welfare Economies
5. Training Economies
6. Research Economies
7. Managerial/ Administrative Economies

DISADVANTAGES OF LARGE FIRMS OR ADVANTAGES A SMALL FIRM HAS OVER LARGE FIRMS

1. Small scale firms require little capital than large firms that requires huge capital
2. Small scale firms can easily adapt to changes in economies conditions than large firms
3. Delay in policy making and management decision are frequent in large firms
4. Control and supervision is easier in small scale firms than in large scale firms
5. A large scale firm suffers from bureaucracy which affects production process than small firm

EVALUATION

1. State five advantages of internal economies of scale
   1. List four disadvantages of internal economies of scale.

EXTERNAL ECONOMIES AND DISECONOMIES

External economies- are the advantages a firm derives from increase in its  output and decrease in costs due to the helps the firm receives from other firms around its area of location, especially in the use of their products . External economies are more common in industrial estates.

External diseconomies, on the other hand, are the increased costs a firm will experience as a result of increasing its output resulting from external effects.

EXTERNAL ECONOMIES OF SCALE OR ADVANTAGES OF INTERDEPENDENCE / CLUSTERING OF FIRMS

1. Inter dependence of industries
2. Creation of employment opportunities
3. Provision of social Amenities
4. It leads to Innovation and Invention.
5. More research is encouraged.
6. There is healthy competition.
7. There is development of organized markets.

EXTERNAL DISECONOMIES OF SCALE OR DISADVANTAGES OF CONCENTRATION OF FIRMS IN A LOCATION

1. There is congestion
2. There is shortage of social amenities
3. It causes uneven development
4. It causes pollution
5. It causes migration

LIMITATIONS TO THE GROWTH OF A FIRM

1. Size of the market.
   1. Availability of raw material.
   1. The nature of the firm’s product.
   1. Efficiency of the factors of production.
   1. The technical know-how.
   1. Managerial constraint
   1. Risk – bearing constraint

EVALUATION

1. What are the advantages that a large firm has over a small firms?
2. What are the disadvantages of external economies of scale?

READING ASSIGNMENT

Amplified and Simplified  Economics for SSS by Femi Longe chapter 5 pages 56-63

Comprehensive Economics for SSS by J.U. Anywele Chapter 5 Paes 52 – 53

GENERAL REVISION

1. What are measures of central tendencies?

2. Give three examples of measures of dispersion.
3. Highlight the importance of a table.
4. Define efficiency in economics
5. Define economics.

WEEKEND ASSIGNMENT

SECTION A.

1. Supervision and control is easier A. in small firms B. in large firm C. to finance

D. commonly the same in both

2. The joint stock companies are an example of A. marketB. medium firmsC. large firm D. Small firm
3. When the growth of a firm is achieved by its own single effort , it is calledA. external diseconomies B. Internal diseconomiesC. external economies D. internal economies of scale
4. Characteristics of a small firm over large firms includes A. small capital required

B. large capital requirementC. provision of standardized productD. large market

5. One of the advantages of large scale production is that   A. there is a rise in the cost of production. B. consumers sacrifice their individual tastes.  C.  the firm can use labour saving machinery.  D. the demand for a firm’s product becomes localized

SECTION B

1.  Write short note on the following;

     a. Marketing economies

     b. Training economies

     c. Welfare economies

     d. Research Economies

2. Describe External Economics of scale.