SCALE OF PRODUCTION: This simply means the size of a firm’s productive capacity.
Scale of production also refers to the size of operation adopted by firm. A firm can be a small scale or medium scale or large scale depending on its capacity.
- Small scale production: This occurs when the productive capacity of a firm is small. There is small output of goods.
- Medium scale production: This occurs when the output is larger than small scale but lower than large scale. It has lower cost of production than small-scale
- Large scale production: It means that the firm’s productive capacity is large. The output is large and the size adopted in production is big.
As a firm increases its output it will enjoy some benefits referred to as economies of large scale production.
ECONOMICS OF SCALE:
Economies of scale can be define as the growth of a firm as a result of the expansion of the volume of productive capacity resulting in the increase in output and a decrease in its cost of production per unit of output. These are the advantages both internal and external which a firm enjoys when it expands the size of output.
Types of Economics of scale
- Internal economies and internal diseconomies.
- External economies and external diseconomies.
INTERNAL ECONOMIES OF SCALE
Internal economies, also known as the economies of large scale production are the advantages firm devices or obtain as a result of its increase in size and expansion of its output.
As the size of the firm increases or expands, this will lead to greater efficiency and a resultant fall in the cost per unit of output.
CLASSIFICATION OF INTERNAL ECONOMICS
- FINANCIAL ECONOMIES: This simply means the ability Of a firm to secure funds cheaply and easily from financial institutions to finance it operation. The major sources of funds are borrowing from financial institutions and issuing of debentures and shares.
- MANAGERIAL ECONOMIES: As a firm’s scale of operation increases, it can employ highly qualified and competent personnel. These skilled employees will contribute a lot to the efficiency and productivity of the organization.
- TECHNICAL ECONOMIES: This is the application of modern machines coupled with the employment of technical experts who handle these machines for positive result.
- WELFARE ECONOMIES: A large firm is able to raise efficiency of labour through improving the conditions under which people work by providing them with canteens, recreational facilities, medical facilities, etc.
- MARKETING ECONOMIES: A large firm can buy raw materials in bulk, produce in large quantities and distribute to many areas where they are required.
- RISK BEARING ECONOMIES: A large organization can spread its risks. When there is instability in the business environment they can withstand any loss or liability.
- RESEARCH ECONOMIES: Large organization can establish their own laboratory and carry out research and developmental programs. This will lead to new invention and possibly better and cheaper methods of production.
Internal diseconomies on the other hand can be defined as the disadvantages which a firm undergoes as a result of expansion, resulting in less efficiency and increase in the cost per unit of output as a result of managerial problems.
DISADVANTAGES OF LARGE SCALE PRODUCTION
- Delay in decision making: As a firm grows in size, decision making process will take longer time.
- Less personnel relationship between workers and management: As a firm grows in size the rapport and interaction that exists when it was small is no more present.
- Difficulties In co-ordination and control of staff: When a firm grows in size, it might be very difficult to co-ordinate and control the staffs.
- Over production and Resource Wastage: One major disadvantage of large scale production is the fact that resources can be wasted in production. This is because goods can be overproduced.
- Large firms take a long time to change their methods of production or to respond to changes in the market. Time is usually wasted before final decisions are reached.
External economies are cost saving advantages which can be enjoyed only by the firms in the same industry. They are benefits due to localization of industry. In other words, External economies are the advantages a firm derives from increase in its output and decrease in costs due to helps the firm receives from other firms especially in the use of their products.
CLASSIFICATION OF EXTERNAL ECONOMIES SCALE
- Economies of by-products
- Technical economies
- Finance economies
- Infrastructural economies
- Research economies
External diseconomies on the other hand are the increased costs a firm will experience as a result of increasing its output resulting from external effects.
- What do you understand by economies of scale:
- Explain types of economies of scale
- Write short notes on
- Small scale production
- Medium scale production
- Large scale production.
4.Explain the internal economic of scale.
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