This is a presentation describing the Economies of Scale in detailed view.

1. UNIVERSITY OF AGRICULTURAL SCIENCES
DEPT OF AGRICULTURAL ECONOMICS
COURSE: PRODUCTION ECONOMICS AND FARM MANAGEMENT
SUBMITTED TO- SUBMITTED BY-
DR. MURTUZA KHAN
PROFESSOR, SAMJHAUTA THAPA
DEPT. OF AG. ECONOMICS PALB-9133

3. Whatis economiesofscale?
• Economies of scale are the cost advantages
that a business obtains due to expansion.
When economists are talking about
economies of scale, they are usually talking
about internal economies of scale. These
are the advantages gained by an individual
firm by increasing its size i.e having larger or
more plants.

4. Whatis diseconomiesofscale?
• Diseconomies of scale are the
disadvantages of being too large. A firm
that increases its scale of operation to a
point where it encounters rising long run
average costs is said to be experiencing
internal diseconomies of scale.

5. InternalandExternaleconomiesof scale
• Internal economies of scale :- Lower long
run average costs resulting from a firm
growing in size.
• External economies of scale :- Lower
long run average costs resulting from an
industry growing in size.

6. Internaland externaldiseconomiesof scale.
• Internal diseconomies of scale :-Higher
long run average cost arising from a
firm growing too large.
• External diseconomies of scale:- Higher
long run average costs resulting from
an industry growing too large

7. Typesof Internal economies of scale
• Buying economies
• Selling economies
• Managerial economies
• Financial economies
• Technical economies
• Research and development
economies
• Risk-bearing economies.

8. BuyingEconomies
• These are the best known type. Large
firms that buy raw materials in bulk and
place large orders for capital equipment
usually receive a discount. This means
that they have paid less for each item
purchased. They may receive a better
treatment because the suppliers will be
anxious to keep such large customers.

9. SellingEconomies
• Every part of marketing has a cost –
particularly promotional methods such as
advertising and running a sales force. Many
of these marketing costs are fixed costs and
so as a business gets larger, it is able to
spread the cost of marketing over a wider
range of products and sales – cutting the
average marketing cost per unit.

10. ManagerialEconomies
• As a firm grows, there is
greater potential for
managers to specialize in
particular tasks (e.g.
marketing, human resource
management, finance).
Specialist managers are
likely to be more efficient as
they possess a high level of
expertise, experience and
qualifications compared to
one person in a smaller firm
trying to perform all of
these roles.

11. Financialeconomies
• Many small businesses
find it hard to obtain
finance and when they do
obtain it, the cost of the
finance is often quite high.
This is because small
businesses are perceived
as being riskier than larger
businesses that have
developed a good track
record. Larger firms
therefore find it easier to
find potential lenders and
to raise money at lower
interest rates.

12. TechnicalEconomies
• Businesses with large-scale production
can use more advanced machinery (or
use existing machinery more efficiently).
This may include using mass production
techniques, which are a more efficient
form of production. A larger firm can also
afford to invest more in research and
development.

13. Researchanddevelopment economies
• A large firm can have a research and
development department, since running
such a department can reduce average
costs by developing more efficient
methods of production and raise total
revenue by developing new products.

14. Risk-bearingeconomies
• Larger firms produce a range of products.
This enables them to spread the risks of
trading. If the profitability of one of the
products it produces falls, it can shift its
resources to the production of more
profitable products.

15. Difficulty controllingthefirm
It can be hard for those
managing a large firm to
supervise everything that is
happening in the business.
Management becomes more
complex and meetings are
necessary quite often.
This can increase administrative
costs and make the firm slower in
responding to changes in
marketing conditions.

16. External economiesofscale
• A skilled labour
workforce – A firm can
recruit workers who have
been trained by other firms
in the industry.
• A good reputation – An
area can gain a reputation
for high quality production.
• Specialist suppliers of raw
materials and capital
goods – When an industry
becomes large enough, it
can become worthwhile for
other industries, called
subsidiary industries to set
up for providing for the
needs of the industry.

17. CONTD…..
• Specialist services – Universities
and colleges ma run courses for
workers in large industries and
banks and transport firms may
provide services, specially
designed to meet the particular
needs of firms in the industry.
• Specialist markets – Some large
industries have specialist selling
places and arrangements such as
corn exchanges and insurance
markets.
• Improved infrastructure – The
growth of an industry may
encourage a govt and private
sector firms to provide better road
links, electricity supplies, build
new airports and develop dock
facilities.