Kamla Lohtia Sanatan Dharam College

Daresi Road , Subash Nagar , Ludhiana .

ON

ASSIGNMENT

BUSINESS ECONOMICS

Submitted to : Submitted by : Ruchi Sharma, Mandeep Singh, Lecturer, BBA Ist year, Business Economics. Roll No. 2212

ECONOMIES OF SCALE may be defined as RETURNS TO SCALE. When firms use their recourses, which are also called Factors of Production, the firms get benefits and suffer losses . These benefits are called ECONOMIES and losses are called DISECONOMIES. Professor Stigler defines the economies of scale as Returns to scale.

MARSHALL classified economies of scale into two parts:-

1.INTERNAL ECONOMIES:According to Cairn cross, Internal Economies are those which are open to a single factory, or a single firm

independently of the action of the other firms. These results from an increase in the scale of output of a firm and cannot be achieved unless output increases. In other words, those economies, which are got by only a single firm, are called internal economies. Other firms are not part of it. When a firm enjoys benefits with his own activities, those benefits are called internal benefits or internal economies. These benefits may be due to reduction of input or may be due to pay less price for factors of production. On this basis, Internal economies are divided into two parts:(1) Real Economies Economies (1) Real Economies:(2) Pecuniary

Real economies are concerned with the reduction of physical quantity of inputs, raw materials, various types of labour etc. When firm uses less raw material or factors of production to produce

same quantity of goods, those benefits enjoyed by the firm are called real economies. These economies are of following types (i) Technical Economies:Technical economies are those when a firm use machinery than the labour. These machineries are suitable for production. So the production is possible on large scale in less time. In this case, machine can work instead of many persons with the help of a single operator. Thus, this reduces the cost and firm enjoys real economies. (ii) Marketing Economies:It is concerned with advertisement, distribution and research to improve the quality of product and to reduce the cost of production. Advertisement and distribution increases the sale and reduces the per unit cost. These are called marketing economies. (iii) Labour Economies:A large firm employs a large number of workers and each worker is given a suitable job, workers are skilled in

their work which saves production times and encourages new ideas. They work with their skill and save time which can be spent on other jobs. In this way efficiency increases. (iv)Managerial Economies:In this the firm use experts of different works and divide work into different parts .Experts helps to reduce cost of production and to save time. They know about the work, analyze the work, collect all information about the work, finds various alternative to do the work or to solve the problem, compare each alternative with other, choose the best one among them. They choose that alternative which use less money and resources. In this way managerial economies are gained. (v) Economies of transport and

storage:-

A firm producing on large scale enjoys transport and storage economies. They use their own transport to carry their product from one place to another. Taking services from BPOs (Business Process Outstanding) is suitable

where less material is to be transported but where large scale production unit produces large quantities of goods then it is suitable to purchase our own vehicles (trucks & containers). Like transport, store houses are required to store produced goods. These economies are called Economies of transport & storage. (2)

Pecuniary economies are those economies when a Firm pays less price for factors. These economies are earned when price, which is to be paid for using factors of production, falls. For example, a firm uses 10 units of labour. The price of per unit of labour is 300. Then the firm will have to pay 3,000 for labour. But if the price of per unit of labour falls from 300 to 250. Then the firm will have to pay 2500 and firm will earn 500. These economies are called Pecuniary economies. These economies are as following:(i)

Pecuniary Economies:-

firms buy raw material in bulk (large quantity), so suppliers give them discount for

Discount in bulk purchases:- The

material. When a firm buys large quantities of product special discount is given to him. So firm gets those goods at reasonable prices. These economies are called pecuniary economies.

Low rate of interest on loan:Generally, the large scale firms are offered
(ii)

loans by banks at low rate of interest just because of their reputation in the market. The banks get assured that their loans will be paid back to them by the firms. So firms enjoy these economies called pecuniary economies.
(iii)

transport companies offer concession to large firms for transportation handling. Large scale firms imports raw material for production and exports their goods in large quantities. They enjoy pecuniary economies by paying less amount to transport companies.

Concession in transportation:- The

2. EXTERNAL ECONOMIES:-

External economies are those economies which are enjoyed by many business units not by a single business unit. These economies are called external economies. According To Cairn Cross, External economies are those benefits, which are shared by number of firms or industries when output increases.

These are as follows:(1)Economies of concentration:As the number of firms increases in an area each firm enjoy benefits like transport & communication, availability of raw material etc. For example, if a firm set up his business unit in a new area where is no other business unit or any BPO. There, doing business will be proved very costly due to lack of consumers, high prices for transportation. On other hand, doing business in that area where raw material is easily available and large number of firms is available will be economical for the business. (2)Economies of information:-

When the number of firms increases they become mutual dependent on each other. So many trade journals are published which provides information to all firms like magazines, yellow pages etc.

(3) Economies of disintegration:As an industry develops all firms decide to develop the work among themselves. Each firm specializes in its own process e.g. some are specialize in chains, some are in rims etc. Each firm knows the activities to be performed by them. They do that as many times that they become specialist in their work. They understand the work well and find new, cheap and best technique of doing work. In this way they reduce cost of production and earn pecuniary economies. (4) Economies of Localization:When an industry settled in an area that area also develop by establishment of railway, transport facility and made of communication etc. Generally people like to build their houses in that area where above facilities are easily available. As the number of consumers increases, the sale of different units also increases. (5) Economies of By-products:-

By product is a product which is produced by one unit as waste during production process but it may be useful for other unit. In other words, waste produced by one firm that is useful for another firm is called By-product. When firm expands its production it try to reduce it cost of production it try to reduce it cost of waste material. So waste material of one firm may be the raw material of another firm, As result the cost of production decreases.

DISECONOMIES

OF SCALE

If a firm has economies, it has also many diseconomies .Diseconomies means losses which occur due to expansion in production of scale. A firm that wants to increase his scale has to face some problems. The firm spends money to solve these problems. Thus the firm suffers some losses. These losses are called diseconomies of scale. These economies are of two types.

(1) Internal Diseconomies:The factors which increases the cost of production of one firm is called Internal Diseconomies. Such diseconomies are not related with

other firms. Only a single firm suffers these diseconomies. These diseconomies are as follows:(a)Inefficient management:When a firm expands beyond some limit it become difficult for a manager to manage it so inefficient management effects business. Only a single manager cannot handle all problems. If more managers are appointed, then they will be given their salary. This will become expense for the firm. (b)Technical Difficulties:A firm has an optimum point of technical economies after that point diseconomies rises. When new techniques are adopted, we suffer some losses. (c)Production Diseconomies:When a firm expands the production due to this cost of production also rises. When factors of production are used continuously, then return decreases and cost increases. The firm has to face some diseconomies called production diseconomies.

(2) External Diseconomies:-

External economies are those which are not suffered by a single firm by the

operating firms in industry. These diseconomies are suffered by group of firms or all the firms. Such diseconomies are called external diseconomies. These are as follows:-

The Environmental Degradation environment problem localization of industry in a particular place or region pollutes the environment. The polluted environment act as health hazard for laborers. All the firms have to face this problem even it has been created by a single unit.
(b)

(a) Diseconomies of pollution:-

Diseconomies of high factor prices :-

When the price of factors go up. If results expansion of industry causes the rise in cost of production. A firm which wants to expand his area of operation has to suffer these diseconomies due to increase in prices of factors of production.