1. Economies and
Diseconomies of Scale
Economies of Scale:
•
Anything which minimises the average cost of production in the
long run as the scale of output is increased.
•
Its measured in physical terms
1) Internal Economies
2) External Economies

2. Internal Economies
•
•
The factors, indigenous to the firm makes the cost of
production falls.
It’s exclusive to the firm and not available to other firms
a)
Labour Economies
In long run specialisation of labour leads to increase in
efficiency which leads to increased productivity and lower
cost of production.
b)
Technological Economies
In the long run more efficient and advanced technology
can be used for large scale production which can also be
used for composite production processes.
c)
Managerial Economies
Reduction in managerial cost as with large scale
production specialist managerial staff can be placed to

3. Internal Economies
d)
Marketing Economies
The buying of inputs (raw material) and selling (goods
produced) can be done more efficiently and effectively by
large firms doing large scale production.
e)
Financial Economies
The cost of obtaining credit and capital is lower to a large
firms and big firms are regarded as less risky.
f)
Risk minimising Economies
Large firms divide risk by diversification. It helps to offset
losses by making profits in certain line of business.

4. External Economies
•
•
They are external to the firms
Such economies are available to all firms / Industry
a)
Economies of concentration
When all firms mutual advantages of facilities – labour,
transport, banking and financial services, infrastructure,
etc . It leads to reduction in operational cost.
b)
Economies of Information and Marketing Intelligence
Established Industry can bring about trade and technical
publications which is accessible to all firms.
c)
Economies of Specialisation
Firm level specialisation leads to increase the productivity
of the firm. Each stage can be disintegrated and
specialised which can lead to better production.

5. Diseconomies of Scale
Diseconomies of scale:
When a firm expands beyond a optimum level.
The average cost rises and leads to diseconomies
1.
2.
3.
4.
5.
6.
7.
8.
Difficulties of management
Difficulties of Co-ordination
Decision – making
Increased risk
Labour Diseconomies
Scarcity of factor supplies
Financial difficulties
Marketing Diseconomies

6. Economies of Scope
Cost effective for a single firm to produce more than one
product than for separate firms to produce an equal
quantity of output of the same product.
1)
2)
In case of a firm produces several products: common
production facilities and inputs
Production of one good results in by-products that can also
be sold by producers.

7. Economies of Scope
Degree of economies of scope =
TC (Q1) + TC (Q2) – TC (Q1 + Q2)
TC (Q1 + Q2)
TC (Q1) = Total cost of production Q1 units of good 1
TC (Q2) = Total cost of production Q2 units of good 2
TC (Q1 + Q2) = Total cost of producing goods 1 and 2 jointly
•
If Degree of Economies of Scope
– Positive: Economies of Scope exist. Producing goods
jointly is cheaper
– Negative: Producing goods separately is cheaper