Internal economies of scale are those which arise from the
growth of the firm independently of what is happening to other firms.
The
broad divisions of internal economies of scale are 1) technical economies 2) Marketing
economies 3) financial economies
and 4) risk bearing economies.
These internal economies may be grouped into a) plant economies of scale
and b) firm economies of scale.
The
plant economies of scale are as
follows.
1)
Increased speicalisation: - It
refers to the chance of the firm to specialize its machine and workers.
2)
Indivisibility of capital: -
larger firms can take the advantages of highly specialized equipment.
3)
Increased dimensions: -
According to this principle, if we double the length, breadth and height of a
cube, its surface area increases four times, and the volume increases eight
times greater than the original.
4)
Principle of multiple: -
Machines can be fully utilized only if the number of machines obtains a
balance.
5)
Bye-product economies: - larger
plants may be able to sell their bye-products commercially.
6)
Economies of liked process: -
large plants will have the capacity to produce more than one product or service
(iron & steel or Bank & real estate) at the same time.
7)
Stock economies: - Large plants
can operate with smaller stocks in proportion to its sales than smaller
plants.
The
firm economies of scale are as
follows.
1)
Marketing economies: - Large
firms are able to buy bulks which enable them to obtain preferential terms such
as lower price, prompt delivery. These firms can afford to employ specialist at
great economy. The amount of selling cost is a huge amount for a large
firm but due to the large output the selling cost per unit will be much lower
than that of a small firm.
2)
Financial economies: - Larger
firms will have huge assets. This makes it a more creditworthy borrower. It has
access several financial advantages such as access to variety of financial
institutions, issue shares, debentures, borrow at more favourable terms, and so
on.
3)
Research & development economies:
- Large firm can utilize the Research facilities more effectively and
efficiently.
4)
Managerial economics: - Large
firm can afford to employ specialized persons and utilize their service
resources fruitfully and proficiently.
5)
Risk bearing economies: - Larger
firm can operate in a wider market, and can diversify its range of products. So
they are better equipped to meet the risk of trading.
6)
Plant specialization economies:
- Larger firm has the ability to specialize their individual plants. This will
help them to get more control over the quality of products.
7)
Staff facilities economies: - A
large firm may be able to offer extra facilities to their staff such as staff
canteens, sports ground and so on at a relatively lower cost.
The
external economies of scale are
the advantages which accrue to firm from the growth in the size of the
industry. These advantages may be gained by firms of any size. Small firms can
specialize on a large scale so that they can collectively achieve many internal economies of scale. External
economies are significant when that industry is heavily localized, so it is
also referred to as economies of
concentration.
The
external economies are
1)
Availability of skilled labour:-
The concentration of similar firms is an area leads to the creation of a
local labour force skilled in the various techniques used in the
industry.(Local colleges develop special courses to train the needs of the
industry.)
2)
Ancillary services:- A high
degree of industrial concentration leads to the growth of subsidiary industry
catering for the special needs of the major industry.
3)
Disintegration:- When industry
is heavily localized, there is a tendency for individual firms to specialize in
a single process or manufacture of a single component. (Production of
cotton cloth is broken down into many processes each carried out by a
specialist firm (Spinning, weaving, dying, finishing etc.)
4)
Co-operation:- Regional
specialization encourages cooperation among firms. Research centers established
as joint ventures by the firms in heavily localized industries.
5)
Common Market:- When there is high degree of concentration of similar firms, it
will cause the introduction of a common
market for its product.
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