By economies scale, we mean the growth of a firm or an industry resulting from expansion of the scale of productive capacity which leads to increase in output and decrease in its cost of production per unit of output. There are two types of economies scale and they are;
1. Internal economies and internal dis-economies.
2. External economies and external dis-economies.
INTERNAL ECONOMIES AND INTERNAL DIS-ECONOMIES
Internal economies, also known as the economies of large scale production are the advantages a firm derives from the expansion of its scale of production as result of its own single efforts. In this case, as the size of the firm increases, there will be greater efficiency resulting in fall in the cost of per unit output.
On the other hand when the firm expansion leads to less efficiency and increase in the cost of per unit output as a result of internal difficulties or organizational constraints, the firm is suffering from what is known as internal dis-economies.
CLASSIFICATION OF AND ADVANTAGES OF INTERNAL ECONOMIES OF LARGE SCALE PRODUCTION OR ADVANTAGES A LARGE FIRM HAS OVER SMALL FIRM
l Technological or Technical Economies: A large firms can afford to apply the use of advanced machines, etc.
l Marketing Economies: A large firm can afford to buy its raw materials in bulk which lowers the price and gets large discount, sells in bulk and saves packing and transport cost, etc.
l Research Economies: A large firm as a result of the size and financial position, can afford to have its own research laboratory and employ competent researchers to man it.
l Financial Economies: A large scale business unit can easily obtain loans from banks, issue shares and debentures to members of the public in order to raise more capital than a small scale business unit.
l Managerial Economies: A large business unit employs managerial experts in different fields more than a small business unit.
l Welfare Economies: A large firm provides welfare facilities to its workers more than a small firm.
l Training Economies: A large firm is in a better position of having its own training institute to its workers more than a small firm.
l Risk-Bearing Economies: A large firm is in a better position of warding off and bearing business risks than a small firm.
DISADVANTAGES OF INTERNAL ECONOMIES OF LARGE SCALE PRODUCTION OR ADVANTAGES OF SMALL SCALE PRODUCTION OR ADVANTAGES OF SMALL SCALE FIRM OVER LARGE SCALE FIRM
- The relationship between employers and employees of a large firm is more impersonal than a small scale firm.
- It is easier for a small scale firm to adjust to business changes than large scale firm.
- A large firm suffers from bureaucracy and red-tapism which slows down its production processes than small scale firm.
- There are more delays in policy and decision making in a large firm than in a small scale firm.
- It requires more capital to establish, run and finance a large scale firm than a small scale firm.
- A large scale firm has increased business risks more than a small scale firm.
LIMITATION OR FACTORS THAT ENCOURAGE OR DISCOURAGE LARGE SCALE PRODUCTION
- The size of the market or the extent of the firm’s goods and services are demanded.
- Availability of raw materials.
- The amount of capital at the reach of firm.
- Availability or non-availability of factors of production.
- Efficiency or non-efficiency of factors of production.
- The application or non-application of division of labour.
- The technological development of the firm.
- The organizational ability of the managers of the firm.
- The extent of development of the firm’s transport and communication.
- The nature of the firm’s production.
EXTERNAL ECONOMIES AND EXTERNAL DISECONOMIES
External economies are the advantages a firm derives from increase in its output and decreases in costs due to helps the firm received from other firms especially in the use of their products. External dis-economies on the hand are the increased costs a firm will experience as a result of increasing it output resulting from external effects.