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Economics Scale

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Title: Economics Scale


1
Dr.K.Baranidharan
  • Present by

2
Engineering Economics Financial Accounting
  • ECONOMICS SCALE

3
ECONOMICS SCALE
  • Alfred Marshall divides the economics of scale
    into two groups
  • Internal and External
  • Economics of scale occur in the Long-run

4
What is economies of scale?
  • Economies of scale are the cost advantages that a
    business obtains due to expansion. When
    economists are talking about economies of scale,
    they are usually talking about internal economies
    of scale. These are the advantages gained by an
    individual firm by increasing its size i.e having
    larger or more plants or production.

5
What is diseconomies of scale?
  • Diseconomies of scale are the disadvantages of
    being too large. A firm that increases its scale
    of operation to a point where it encounters
    rising long run average costs is said to be
    experiencing internal diseconomies of scale.

6
Internal and External economies of scale.
  • Internal economies of scale - lower long run
    average costs resulting from a firm growing in
    size.
  • External economies of scale - lower long run
    average costs resulting from an industry growing
    in size.

7
Internal and external diseconomies of scale.
  • Internal diseconomies of scale -higher long run
    average cost arising from a firm growing too
    large.
  • External diseconomies of scale- higher long run
    average costs resulting from an industry growing
    too large

8
Types of Internal economies of scale.
  • Buying economies
  • Selling economies
  • Managerial economies
  • Financial economies
  • Technical economies
  • Research and development economies
  • Risk-bearing economies.

9
Buying Economies.
  • These are the best known type. Large firms that
    buy raw materials in bulk and place large orders
    for capital equipment usually receive a
    discount. This means that they have paid less for
    each item purchased. They may receive a better
    treatment because the suppliers will be anxious
    to keep such large customers.

10
Selling Economies.
  • Every part of marketing has a cost particularly
    promotional methods such as advertising and
    running a sales force. Many of these marketing
    costs are fixed costs and so as a business gets
    larger, it is able to spread the cost of
    marketing over a wider range of products and
    sales cutting the average marketing cost per
    unit.

11
Managerial Economies.
  • As a firm grows, there is greater potential for
    managers to specialize in particular tasks (e.g.
    marketing, human resource management, finance).
    Specialist managers are likely to be more
    efficient as they possess a high level of
    expertise, experience and qualifications compared
    to one person in a smaller firm trying to perform
    all of these roles.

12
Financial economies
  • Many small businesses find it hard to obtain
    finance and when they do obtain it, the cost of
    the finance is often quite high. This is because
    small businesses are perceived as being riskier
    than larger businesses that have developed a good
    track record. Larger firms therefore find it
    easier to find potential lenders and to raise
    money at lower interest rates.

13
Technical Economies.
  • Businesses with large-scale production can use
    more advanced machinery (or use existing
    machinery more efficiently). This may include
    using mass production techniques, which are a
    more efficient form of production. A larger firm
    can also afford to invest more in research and
    development.

14
Research and development economies.
  • A large firm can have a Research and Development
    department, since running such a department can
    reduce average costs by developing more efficient
    methods of production and raise total revenue by
    developing new products.

15
Risk-bearing economies.
  • Larger firms produce a range of products. This
    enables them to spread the risks of trading. If
    the profitability of one of the products it
    produces falls, it can shift its resources to the
    production of more profitable products.

16
Internal Diseconomies of scale.
  • Growing beyond a certain output can cause a firms
    average costs to rise. This is because the firm
    may encounter a number of problems including
    difficulties -
  • controlling the firm.
  • communication problems.
  • poor industrial relations.

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External economies of scale.
  • A skilled labour workforce A firm can recruit
    workers who have been trained by other firms in
    the industry.
  • A good reputation An area can gain a reputation
    for high quality production.
  • Specialist suppliers of raw materials and capital
    goods When an industry becomes large enough, it
    can become worthwhile for other industries,
    called subsidiary industries to set up for
    providing for the needs of the industry.

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External economies of scale.
  • Specialist services Universities and colleges
    ma run courses for workers in large industries
    and banks and transport firms may provide
    services, specially designed to meet the
    particular needs of firms in the industry.
  • Specialist markets Some large industries have
    specialist selling places and arrangements such
    as corn exchanges and insurance markets.
  • Improved infrastructure The growth of an
    industry may encourage a govt and private sector
    firms to provide better road links, electricity
    supplies, build new airports and develop dock
    facilities.

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External Diseconomies of scale.
  • Just as a firm can grow too large, so can an
    industry.
  • Larger firms -gt transportation increase -gt
    congestion -gt increased journey time -gt high
    transport cost -gt reduced workers productivity.
  • Growth of industry may increase competition for
    resources, pushing up the price of key sites,
    capital equipment and labour.

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Dr.K.BaranidharanThank you
  • K YOU

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THE END.
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