Economies of Scale

Economies of scale can be of two kinds-- internal economies and external economies. Internal economies of scale are those which arise from the firm increasing its plant size. On the other hand, external economies arise outside the firm-from improvement (or, deterioration) in the environment in which the firm operates. The economies external to the firm may be realized from actions of other firms in the same or in another industry.

While the internal economies of scale relate only to the long run and determine the shape of the long-run cost curve, the external economies affect the position of the long-run cost curves.

Internal Economies

Internal economies are given in a summary form in the figure given later in the chapter, where these are categorized into real and pecuniary economies. Real economies arise when the quantity of inputs used for a given level of output decreases. While pecuniary economics are those savings in expenses, which accrue to the firm in the nature of relatively, lower prices paid for inputs and lower costs of distribution. These savings arise due to bulk buying and selling by the growing firm

Real Economies of Scale

Real economies are of four kinds:

a. Production economies

b. Marketing economies

c. Managerial economies

d. Transport and storage economies

a) Production Economies

Production economies arise from

(a) Labor

(b) Fixed capital

(c) Inventory requirements of the firm.

These are as follows:

Labor economies-- Labor economies arise because of the following factors: 

(ii) Division of labor economies-- Larger output allows division of labor, which reduces cost by increasing specialization, by saving time (otherwise lost in passing from one operation to another), and providing good conditions for inventions of a great number of machines.

(iii) Cumulative volume economies-- The technical personnel engaged in production tend to acquire significant experience from large-scale production. This 'cumulative volume' experience helps in higher productivity and, therefore, reduced costs