economies of scale

economies of scale

as a firm increases output its average cost per unit decreases as a result of more efficient allocation of resources and costs are spread over more output.

types of economies of scale

internal economies of scale and external economies of scale

types of economies of scale

1. financial economies of scale

2. technical economies of scale

3. marketing economies of scale

4. managerial economies of scale

5. risk bearing economies of scale

technical economies of scale

the use of advanced technology, machinary and new plant to increase outpot leads to technical economies of scale.

marketing economies of scale

type of internal economies of scale where a firm reduces its advertising and marketing costs per unit as it expands production.

example of marketing economies of scale

If a company spends $100,000 on a national advertising campaign and produces 1 million units, the advertising cost per unit is $0.10. If production doubles to 2 million units, the cost per unit drops to $0.05.

financial economies of scale

Financial economies of scale are a type of internal economy of scale where larger firms can obtain finance more easily and at lower interest rates than smaller firms.

manegarial economies of scale

type of internal economies of scale where they hire specialist managers for carring out operations which reduces the average cost

risk bearing economy of scale

it is a type of economies of scale where the risk of uncertainty can be spread across wider range of products, markets or operations

labour economies

the economies resulting from the division of labour to different operations of the business

internal diseconomies of scale

the point where the firms increases its size and production so much that the overall ac pu starts increasing rather than decreasing.

the problem that arises due to internal diseconomies of scale

overspecialization, loss of managerial control, decline in labour relations, price of inputs, monopoly power

external economies of scale

External economies of scale are cost advantages that occur when the whole industry grows, leading to lower average costs for all firms in that industry, regardless of their own size.

LRAC curve at external economies of scale

the LRAC curve shifts down wards at each and every point of production

LRAC at externa diseconomies of scale

the LRAC curve shitfts upwards at each and every point of output

external diseconomies of scale

External diseconomies of scale are disadvantages that occur when the whole industry expands, causing the average costs of all firms in that industry to rise.

causes of external diseconomies of scale

• Competition for limited resources → driving up wages for skilled labour or prices for raw materials.

• Overcrowding in an industrial area → causing congestion, delays, and higher transport costs.

• Strain on local infrastructure → making utilities like electricity or water more expensive or less reliable.

ways to reduce external diseconomies of scale

. Improve infrastructure

• Governments and local authorities can invest in better roads, transport links, ports, and utilities to reduce congestion and delays.

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2. Expand supply of skilled labour

• Create more training programs, vocational schools, and apprenticeships to match industry demand.

• Encourage migration or relocation of skilled workers into the region.

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3. Increase supply of raw materials

• Develop new suppliers or expand existing ones to meet growing demand.

• Promote alternative or substitute materials to reduce shortages.

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4. Better industrial planning

• Spread out industries across different locations to avoid overcrowding in one area.

• Establish industrial zones with adequate space and services.