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ANALYSIS OF ECONOMIESOF SCALE
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CHART SHOWINGECONOMIES OF SCALE
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CHART CONTINUED
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CHART CONTINUED
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INTRODUCTION
What Does Economies Of Scale Mean?
The increase in efficiency of production as the number of goods being produced increases.Economies of scale , refers to thecost advantages that a businessobtains due to expansion. There arefactors that cause a producersaverage cost per unit to fall as the
scale of output is increased." "
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INTERNAL ECONOMIES
Internal economies are thosewhich arise from the firmincreasing its plant size. Internal
economies are of two types:Real
Pecuniary
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REAL ECONOMIES OF SCALE
Real economies arise when thequantity of inputs used for agiven level of output decreases.
Real economies scale are of 4kinds:
1. Production economies
2. Marketing economies
3. Managerial economies
4. Transport and storage
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PRODUCTION ECONOMIES
Production economies mayarose from the factor labour, fromthe factor fixed capital or from the
inventory requirements of the firm.LABOUR ECONOMIES
Labour economies are achievedas the scale of output increases forseveral reasons:
a.
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TECHNICAL ECONOMIES:Technical economies are
associated with the fixed capitalwhich includes all types of machinery and other equipments.
The main technical economies
arise from:
a. specialization and indivisibility
of capital
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INVENTORY ECONOMIES:
Role of inventories is to meet therandom changes in the input andthe output size of the operations of the firm. It has been found that theinput as well as output inventoriesincrease at a rate lower than thatof increase in output.
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Marketing Economies
Selling economies are associatedwith the distribution of the productof a firm. The main type of the
economies area. advertising economies
b. other large scale economies
c. economies with specialarrangements with exclusivedealers
. m l h n n mi .
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Advertising expenses isgenerally found to have increasedless than proportionately with the
scale. Thus the larger the outputthe smaller the advertising cost perunit.
Other types of selling activitiessuch as the salesman force, thedistribution of samples , etc arelarge scale promotion expenditurewhich increase b less than
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Large firms can enter exclusiveagreement with distributors whoundertake the obligation of
maintaining a good servicedepartment for the product of themanufacturer.
In modern industry firms needto change the style of their productquite frequently in order to meetthe demands of their customersand the com etition of the rival
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MANAGERIAL ECONOMIES
Managerial costs are partlyproduction costs and partlyselling costs. Managerial
economies arise because:a. larger the firm greater are
the opportunities for the division of
managerial tasks. The division of managerial tasks helps managersto specialize in their own areas of responsibilities thus leading to
reater efficienc .
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c. In a large firm withdecentralization in decision makingthe delays in the flow of
information is reduced therebyincrease in the efficiency of management.
d. Large firms provideopportunities for the introduction of modern managerial techniques andorganizational restructuring. Thishel the mana ement to increase
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TRANSPORT AND STORAGE
Transport cost had incurred partlyon the production side and partlyon the selling side of the firm.
Storage cost obviously fall with theincrease in the size of output as itprovides the economies of increased dimension.
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PECUNIARY ECONOMIES OF SCALE
These are economies accruing tothe firm due to discounts that itcan obtain due to its large scale
operations. The discount may be inthe nature of :
a. lower raw material price due
to bulk buyingb. lower cost of capital, as
banks usually plays greater faith in
the large firms and therefore
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c. offers of lower rates foradvertising to large firms becauseof their large scale advertising
d. Lower transportation rate dueto bulk transportation
e. in case the large form is ableto create an image of prestige tobe associated with the firm it maybe in a position to save on labour
cost by paying lower wages and
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EXTERNAL ECONOMIES
Like internal economies externaleconomies also help in cuttingdown production cost with an
expansion of an industry, certainspecialized firm also come up forworking up the by-products andwaste materials. Thus a firmbenefits from expansion of anindustry as a whole.
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DISECONOMIES OF SCALE
When a firm continues toexpand its size a stage comeswhen diminishing returns to scale
set in. As a firm expands beyond alevel it encounters growingdiseconomies.
Technical factors are unlikely toproduce diseconomies of scale.When diseconomies of scale arisethey are more likely to beassociated with the human and
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Secondly there is the problem of moral and motivation of bothmanagement and labour force.
In short, we may say thatdecreasing returns to scale willbecome operative when
management becomes a problem.
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THANK YOU