FYBCOM Economics Sem 1 Chapter 6 Notes
(Economies of Scale and Diseconomies of Scale)
1) Explain the internal and external economies of scale.
Answer: According to Alfred Marshall Economies of scale are broadly classified into Internal economies of scale and external economies of scale. In the large-scale production, the cost of production should be low which is called as economies of scale.
Internal economies of scale are an increase in the scale or size of production or output of a firm these are solely enjoyable by the firm independently by making changes in the input factors of production into his business.
A firm enjoy internal economies of scale when he expands his size or scale of production in economy by making changes in the internal factors of production.
Where on the other hand a firm enjoy internal economies of scale when he expands his size of production in economy by making changes in the external factors of production.
If the firm is unable to manage the level of output or the scale of operation diseconomies of scale occurs. If firm do not understand the importance of the specialisation of division of labour and specialisation of division management activities the level of output or scale of operation decreases leads to diseconomies of scale in economy.
Suppose a firm take huge amount of loan from a financial institution or banks to expand his level of output. Such loan increases the burden on firm to prove their credit leads to financial diseconomies of scale.
Economies of scale refer to the cost advantages that organizations can achieve as they increase their level of production or expand their operations.
2) Explain in brief external economies and diseconomies of scale.
Answer: External economies of scale refer to those economies which provides benefits and facilities to all firms of given industry. It is an economy which is enjoyed by all firms of industry irrespective of their size of operation. External economies of scale are also of various types which are follows:
External diseconomies of scale results when there is an increasing in the total cost of production beyond t he control of a company and it reduces the level of output. The increase in costs can be due to increase in the market price of factors of production.
The external diseconomies are not suffered by a single firm but by whole firms operating in a given industry. These diseconomies arise due to much concentration and localization of industries beyond a certain stage.
For example, Localization may lead to increase in the demand for transport and, therefore, transport costs rise and it leads to diseconomies of scale in the economy
3) Write a short note on economies of scope.
Answer: Economies of scope refer to a situation where, in the long run, a firm tries to reduce the average and marginal cost of production by producing large varieties of output.
Economies of scope are different from economies of scale in that the former means producing a variety of different products or multiples of products together to reduce costs, while the latter means producing more of the same product in order to reduce costs by increasing the efficiency of production.
Economies of scope can arise from the co-production relationships between the final products or the actual products. In economic terms, these goods are complements in production.
This is when the production of one good automatically produces another good as a by-product or a kind of side effect in the production process.
Sometimes one product might be a by-product of another but have value for use by the producer or for sale. Finding a productive use or market for the co-products can reduce costs or increase revenue.