Economies of Scale, including internal and external economies, their factors, and diseconomies of scale:
26/June/2025 00:33
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✅ Definition: Economies of Scale (in Brief)
Economies of scale refer to the cost advantages a firm experiences when it increases production, leading to a lower cost per unit. As output expands, fixed and variable costs are spread over more units, improving efficiency.
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? Types of Economies of Scale
? 1. Internal Economies of Scale
These arise within the firm due to its own expansion and efficiency improvements.
✅ Factors Leading to Internal Economies:
Type Description
Technical Economies Use of better machinery, automation, and modern production techniques
Managerial Economies Hiring specialized managers for departments leads to better coordination
Financial Economies Large firms can borrow at lower interest rates due to better creditworthiness
Marketing Economies Bulk buying/selling, advertisement cost per unit reduces
Purchasing Economies Discounts on bulk purchase of raw materials
Risk-Bearing Economies Diversification spreads risk across products or markets
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? 2. External Economies of Scale
These arise outside the firm but benefit the firm due to the growth of the industry or region.
✅ Factors Leading to External Economies:
Source Description
Skilled Labor Pool Development of industry hub attracts skilled workers
Supplier Network Availability of raw materials and parts suppliers in the area
Infrastructure Development Improved transport, storage, communication facilities
Shared Services Shared R&D, maintenance, or training services
Cluster Effect Firms in same industry benefit from proximity to each other (e.g., Silicon Valley)
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❌ Diseconomies of Scale
As firms grow too large, they may start facing higher per unit costs instead of lower. This is known as diseconomies of scale.
? Causes of Diseconomies of Scale:
Type Description
Managerial Inefficiency Difficulties in communication, coordination, and supervision
Labor Issues Low motivation or sense of alienation in a large workforce
Bureaucracy Slower decision-making due to too many layers of authority
Rising Input Prices Higher demand for inputs raises prices in industry clusters
Over-utilization of Resources Machinery or facilities stretched beyond optimal capacity
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✅ Conclusion
Economies of scale help businesses reduce costs and become more competitive, especially in mass production. However, after a certain point, diseconomies may arise, making it important for managers to balance size with efficiency.
