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NAME:P.SATHISH KUMAR
CLASS:1-MBA
SUBJECT:ECONOMICS
TOPIC:KINDS OF
ECONOMICS AND
DISECONOMIES OF SCALE.
SUBMITTED TO:BASKAR SIR
ECONOMIES OF SCALE
ECONOMIES OF SCALE
• THE ADVANTAGES OF LARGE SCALE PRODUCTION THAT
RESULT IN LOWER UNIT (AVERAGE) COSTS (COST PER UNIT)
• AC = TC / Q
• ECONOMIES OF SCALE – SPREADS TOTAL COSTS OVER A
GREATER RANGE OF OUTPUT
ECONOMIES OF SCALE
• INTERNAL – ADVANTAGES THAT ARISE AS A RESULT OF THE
GROWTH OF THE FIRM
• TECHNICAL
• COMMERCIAL
• FINANCIAL
• MANAGERIAL
• RISK BEARING
ECONOMIES OF SCALE
• EXTERNAL ECONOMIES OF SCALE – THE
ADVANTAGES FIRMS CAN GAIN AS A RESULT
OF THE GROWTH OF THE INDUSTRY –
NORMALLY ASSOCIATED WITH A PARTICULAR
AREA
• SUPPLY OF SKILLED LABOUR
• REPUTATION
• LOCAL KNOWLEDGE AND SKILLS
• INFRASTRUCTURE
• TRAINING FACILITIES
ECONOMIES OF SCALE
Capital Land Labour Output TC AC
Scale A 5 3 4 100
Scale B 10 6 8 300
•Assume each unit of capital = £5, Land = £8
and Labour = £2
•Calculate TC and then AC for the two different
‘scales’ (‘sizes’) of production facility
•What happens and why?
Economies of Scale
Capital Land Labour Output TC AC
Scale A 5 3 4 100 57 0.57
Scale B 10 6 8 300 164 0.54
•Doubling the scale of production (a rise of 100%) has led
to an increase in output of 200% - therefore cost of
production
•PER UNIT has fallen
•Don’t get confused between Total Cost and Average Cost
•Overall ‘costs’ will rise but unit costs can fall
•Why?
ECONOMIES OF SCALE
• INTERNAL: TECHNICAL
• SPECIALISATION – LARGE ORGANISATIONS
CAN EMPLOY SPECIALISED LABOUR
• INDIVISIBILITY OF PLANT – MACHINES CAN’T BE
BROKEN DOWN TO DO SMALLER JOBS!
• PRINCIPLE OF MULTIPLES – FIRMS USING MORE
THAN ONE MACHINE OF DIFFERENT CAPACITIES -
MORE EFFICIENT
• INCREASED DIMENSIONS – BIGGER CONTAINERS
CAN REDUCE AVERAGE COST
ECONOMIES OF SCALE
• INDIVISIBILITY OF PLANT:
• NOT VIABLE TO PRODUCE PRODUCTS
LIKE OIL, CHEMICALS ON SMALL SCALE – NEED LARGE
AMOUNTS OF CAPITAL
• AGRICULTURE – MACHINERY APPROPRIATE FOR LARGE
SCALE WORK – COMBINES, ETC.
ECONOMIES OF SCALE
• PRINCIPLE OF MULTIPLES:
• SOME PRODUCTION PROCESSES
NEED MORE THAN ONE MACHINE
• DIFFERENT CAPACITIES
• MAY NEED MORE THAN ONE MACHINE TO BE FULLY
EFFICIENT
ECONOMIES OF SCALE
• PRINCIPLE OF MULTIPLES: E.G.
Machine A Machine B Machine C Machine D
Capacity =
10 per hour
Capacity =
20 per hour
Capacity =
15 per hour
Capacity =
30 per hour
Cost = £100
per machine
Cost = £50
per machine
Cost = £150
per machine
Cost = £200
per machine
Company A = 1 of each machine, output per hour = 10
Total Cost = £500
AC = £50 per unit
Company B = 6 x A, 3 x B, 4 x C, 2 x D – output per hour = 60
Total Cost = £1750
AC = £29.16 per unit
ECONOMIES OF SCALE
Increased Dimensions: e.g.
5m
2m
2m
Transport container = Volume of 20m3
Total Cost: Construction, driver, fuel,
maintenance, insurance, road tax =
£600 per journey
AC = £30m3
4m
10m
4m
Transport Container 2 = Volume 160m3
Total Cost = £1800 per
journey
AC = £11.25m3
ECONOMIES OF SCALE
• COMMERCIAL
• LARGE FIRMS CAN NEGOTIATE FAVOURABLE PRICES AS A
RESULT
OF BUYING IN BULK
• LARGE FIRMS MAY HAVE ADVANTAGES IN KEEPING PRICES
HIGHER BECAUSE
OF THEIR MARKET POWER
ECONOMIES OF SCALE
• FINANCIAL
• LARGE FIRMS ABLE TO NEGOTIATE CHEAPER FINANCE
DEALS
• LARGE FIRMS ABLE TO BE MORE FLEXIBLE ABOUT FINANCE –
SHARE OPTIONS, RIGHTS ISSUES, ETC.
• LARGE FIRMS ABLE TO UTILISE SKILLS OF MERCHANT BANKS
TO ARRANGE FINANCE
ECONOMIES OF SCALE
•MANAGERIAL
•USE OF SPECIALISTS –
ACCOUNTANTS, MARKETING,
LAWYERS, PRODUCTION,
HUMAN RESOURCES, ETC.
ECONOMIES OF SCALE
•RISK BEARING
• DIVERSIFICATION
• MARKETS ACROSS
REGIONS/COUNTRIES
• PRODUCT RANGES
• R&D
ECONOMIES OF SCALE
Minimum Efficient Scale – the point
at which the increase in the scale of production
yields no significant unit cost benefits
Minimum Efficient Plant Size – the
point where increasing the scale of production of
an individual plant within the industry yields
no significant unit cost benefits
ECONOMIES OF SCALE
Unit Cost
Output
Scale A
Scale B
LRAC
MES
82p
54p
DISECONOMIES OF SCALE
• THE DISADVANTAGES OF LARGE SCALE
PRODUCTION THAT CAN LEAD TO INCREASING
AVERAGE COSTS
• PROBLEMS OF MANAGEMENT
• MAINTAINING EFFECTIVE COMMUNICATION
• CO-ORDINATING ACTIVITIES – OFTEN ACROSS
THE GLOBE!
• DE-MOTIVATION AND ALIENATION OF STAFF
• DIVORCE OF OWNERSHIP AND CONTROL
• THANK YOU

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Kind ofEconomics and diseconomies of scale .ppt

  • 1. NAME:P.SATHISH KUMAR CLASS:1-MBA SUBJECT:ECONOMICS TOPIC:KINDS OF ECONOMICS AND DISECONOMIES OF SCALE. SUBMITTED TO:BASKAR SIR
  • 3. ECONOMIES OF SCALE • THE ADVANTAGES OF LARGE SCALE PRODUCTION THAT RESULT IN LOWER UNIT (AVERAGE) COSTS (COST PER UNIT) • AC = TC / Q • ECONOMIES OF SCALE – SPREADS TOTAL COSTS OVER A GREATER RANGE OF OUTPUT
  • 4. ECONOMIES OF SCALE • INTERNAL – ADVANTAGES THAT ARISE AS A RESULT OF THE GROWTH OF THE FIRM • TECHNICAL • COMMERCIAL • FINANCIAL • MANAGERIAL • RISK BEARING
  • 5. ECONOMIES OF SCALE • EXTERNAL ECONOMIES OF SCALE – THE ADVANTAGES FIRMS CAN GAIN AS A RESULT OF THE GROWTH OF THE INDUSTRY – NORMALLY ASSOCIATED WITH A PARTICULAR AREA • SUPPLY OF SKILLED LABOUR • REPUTATION • LOCAL KNOWLEDGE AND SKILLS • INFRASTRUCTURE • TRAINING FACILITIES
  • 6. ECONOMIES OF SCALE Capital Land Labour Output TC AC Scale A 5 3 4 100 Scale B 10 6 8 300 •Assume each unit of capital = £5, Land = £8 and Labour = £2 •Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility •What happens and why?
  • 7. Economies of Scale Capital Land Labour Output TC AC Scale A 5 3 4 100 57 0.57 Scale B 10 6 8 300 164 0.54 •Doubling the scale of production (a rise of 100%) has led to an increase in output of 200% - therefore cost of production •PER UNIT has fallen •Don’t get confused between Total Cost and Average Cost •Overall ‘costs’ will rise but unit costs can fall •Why?
  • 8. ECONOMIES OF SCALE • INTERNAL: TECHNICAL • SPECIALISATION – LARGE ORGANISATIONS CAN EMPLOY SPECIALISED LABOUR • INDIVISIBILITY OF PLANT – MACHINES CAN’T BE BROKEN DOWN TO DO SMALLER JOBS! • PRINCIPLE OF MULTIPLES – FIRMS USING MORE THAN ONE MACHINE OF DIFFERENT CAPACITIES - MORE EFFICIENT • INCREASED DIMENSIONS – BIGGER CONTAINERS CAN REDUCE AVERAGE COST
  • 9. ECONOMIES OF SCALE • INDIVISIBILITY OF PLANT: • NOT VIABLE TO PRODUCE PRODUCTS LIKE OIL, CHEMICALS ON SMALL SCALE – NEED LARGE AMOUNTS OF CAPITAL • AGRICULTURE – MACHINERY APPROPRIATE FOR LARGE SCALE WORK – COMBINES, ETC.
  • 10. ECONOMIES OF SCALE • PRINCIPLE OF MULTIPLES: • SOME PRODUCTION PROCESSES NEED MORE THAN ONE MACHINE • DIFFERENT CAPACITIES • MAY NEED MORE THAN ONE MACHINE TO BE FULLY EFFICIENT
  • 11. ECONOMIES OF SCALE • PRINCIPLE OF MULTIPLES: E.G. Machine A Machine B Machine C Machine D Capacity = 10 per hour Capacity = 20 per hour Capacity = 15 per hour Capacity = 30 per hour Cost = £100 per machine Cost = £50 per machine Cost = £150 per machine Cost = £200 per machine Company A = 1 of each machine, output per hour = 10 Total Cost = £500 AC = £50 per unit Company B = 6 x A, 3 x B, 4 x C, 2 x D – output per hour = 60 Total Cost = £1750 AC = £29.16 per unit
  • 12. ECONOMIES OF SCALE Increased Dimensions: e.g. 5m 2m 2m Transport container = Volume of 20m3 Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = £600 per journey AC = £30m3 4m 10m 4m Transport Container 2 = Volume 160m3 Total Cost = £1800 per journey AC = £11.25m3
  • 13. ECONOMIES OF SCALE • COMMERCIAL • LARGE FIRMS CAN NEGOTIATE FAVOURABLE PRICES AS A RESULT OF BUYING IN BULK • LARGE FIRMS MAY HAVE ADVANTAGES IN KEEPING PRICES HIGHER BECAUSE OF THEIR MARKET POWER
  • 14. ECONOMIES OF SCALE • FINANCIAL • LARGE FIRMS ABLE TO NEGOTIATE CHEAPER FINANCE DEALS • LARGE FIRMS ABLE TO BE MORE FLEXIBLE ABOUT FINANCE – SHARE OPTIONS, RIGHTS ISSUES, ETC. • LARGE FIRMS ABLE TO UTILISE SKILLS OF MERCHANT BANKS TO ARRANGE FINANCE
  • 15. ECONOMIES OF SCALE •MANAGERIAL •USE OF SPECIALISTS – ACCOUNTANTS, MARKETING, LAWYERS, PRODUCTION, HUMAN RESOURCES, ETC.
  • 16. ECONOMIES OF SCALE •RISK BEARING • DIVERSIFICATION • MARKETS ACROSS REGIONS/COUNTRIES • PRODUCT RANGES • R&D
  • 17. ECONOMIES OF SCALE Minimum Efficient Scale – the point at which the increase in the scale of production yields no significant unit cost benefits Minimum Efficient Plant Size – the point where increasing the scale of production of an individual plant within the industry yields no significant unit cost benefits
  • 18. ECONOMIES OF SCALE Unit Cost Output Scale A Scale B LRAC MES 82p 54p
  • 19. DISECONOMIES OF SCALE • THE DISADVANTAGES OF LARGE SCALE PRODUCTION THAT CAN LEAD TO INCREASING AVERAGE COSTS • PROBLEMS OF MANAGEMENT • MAINTAINING EFFECTIVE COMMUNICATION • CO-ORDINATING ACTIVITIES – OFTEN ACROSS THE GLOBE! • DE-MOTIVATION AND ALIENATION OF STAFF • DIVORCE OF OWNERSHIP AND CONTROL