Economies of Scale
“Economies of scale refer to the advantages which a firm
derives and this is responsible for increasing returns to
scale”.
Economies and Diseconomies of Scale
Average
Total
Cost
ATC in long run
Economies
of scale
0
Constant Returns
to scale
Diseconomies
of scale
Quantity of
Cars per Day
Types of economies of scale:
1. Internal Economies.
2. External Economies.
Internal economies:
“The term refers to those advantages which are enjoyed
by an individual firm as an industry”.
Such benefits are not shared by all but only to that firm
which grows in size.
For example. Hotel industry. As different individual
restaurants grow in size e.g. expands the sale, it alone will
enjoy certain advantages, these benefits can be termed as
internal economies.
Internal economies enjoyed by an individual firm
can be discussed under different categories as follows:
1.Technical Economies.
2. Managerial economies.
3. Marketing economies.
4. Financial economies.
5. Risk bearing economies.
External Economies
As a result of growth of a particular industry many benefits are
shared by all the firms or sectors. There are certain advantages
which are enjoyed by all firms in industries or sectors, this term
is called external economies.
Fore example, a particular place becomes a favorite tourist
attraction i.e. Khandala. The restaurants and hotels, auto
drivers, and other people in that area can naturally get number
of advantages.
The external economies emerges particularly from the
localization of industry.
Various such economies can be discussed as follows:
1. Economies of concentration.
i.e. provision of transport, labour, finance, power etc.
2. Economies of Disintegration.
i.e. supply of the raw material by small industries which reduce the cost.
3. Economies of information.
i.e. journals, IT information, marketing & research department etc.
Causes of diminishing returns –...