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Lesson Note

Subject: Economics
Topic: Scale of Production
Learning Objectives: By the end of the lesson, the learners should be able to:

  • Define economies of scale;
  • State and discuss the types of economies and diseconomies of scale;
  • State the limitations to the scale of production or to the growth of firms.

Lesson Summary


definition :Economies of scale can be defined as the growth of a firm as a result of the expansion of the volume of productive capacity resulting in the increase in output and a decrease in its cost of production per unit of output .

Types of economies of scale

There are two major types of economies of scale these are . (1) internal economies and internal diseconomies (2) External economies and external diseconomies .

Internal Economies and Internal Diseconomies

Definition: internal economies , also popularly known as the economies of large scale production, is defined as the advantage which a firm derives or obtains as a result of its increase in size and expansion of its outputs. As the size of the firm increases or expands , this will lead to greater efficiency and a resultant fall in the cost per unit of output .These advantages being enjoyed by this firm could come from financial , managerial, or technical large scale production which takes place within the firm Internal diseconomies on the other hand can be defined as the disadvantages which a firm undergoes as a result of expansion , resulting in less efficiency and increase in the cost per unit of output as a result of managerial problems ..

Classification of internal Economies of Large scale of Production

(1) Financial Economies :a large business firm or unit can easily raise fund from banks or other sources , purchase raw materials in bulk at a cheaper rate this will affect the cost of the finished product .
(2)Administrative economies :as a result of a second financial base , a large base business firm is capable of employing experts and competent managers to manage the firm efficiently .
(3) Research economies :A large firm , as a result its size and strong financial base , is able to carry out research work into new areas in order to improve production.
(4) Technical economies :this is the application of modern machines coupled with the employment of technical experts who handle these machines for positive result .this is only possible with the large firms.
(5) Specialisation economies :as a result of increase in size and strong financial base , a firm through division of labour , enables individuals to specialise in certain operations.
(6) Welfare economies :a large firm is able to raise efficient of labour through improving the conditions under which the people work by providing them with canteens , recreational facilities ,medical facilities etc.
(7) Risk bearing economies :a large firm is more likely to withstand losses as a result of certain risks taken than a smaller firm.
(8) Marketing economies : a large firm can buy raw materials in bulk , produce in large quantities and distribute to many areas where they are required .

Limitations to the scale of production or to the growth of firms

(1) Extent of the market :when there is a high demand for certain products of a firm , this will motivate the firm to produce more goods and expand (2) availability of capital :The availability of capital and other resources will enable a firm to expand and produce more goods , but when these resources are not available , growth and expansion are impossible . (3) falling price of the commodity :a falling price of the commodity without corresponding increase in supply definitely tends to lower the scale of production (4) increased risks :it is known that the bigger a firm , the greater level of risks and vice versa ,.in order to reduce risks , the size of the firm has to be reduced . (5) Need to cater for individual taste : large firms are known and associated with standardisation of products which does not meet the taste the individuals. To meet this taste there will be limitation in the scale of production (6) Nature of business ; the nature of the business is directly related to the scale of production when a large number of people demand for a particular commodity , it will require a large firm to handle it but when a personal service of a barber is required , the size of the firm must be small . (7) Nature of the firm’s product :if a firms product s are of inferior and perishable type , their size and growth are definitely going to be limited (8) increasing management costs : when a firm embarks on a scale expansion , there is a corresponding employment of managers and this tends to increase the cost of production of such firms

External Economies and External Diseconomies

Definition :External economies are the benefits a firm derives from concentration or localisation of industries in a a particular area. In other words , these are the benefits a firm enjoys from increase in its outputs and decrease in costs as a result of the kind of assistance it derives from other firms within the same location. External economies are mostly derived from industrial estates where there are many firms operating in the same location. External diseconomies on the other hand refer to the disadvantages a firm experiences when the activities of one or more industries increase the cost of production or output of that firm within the same location. The advantages and disadvantages of localisation of industries is also applicable to external economies and diseconomies.

Small and Large Firm

A firm may be defined as an independently administered business unit which is capable of carrying out production , construction or distribution activities. It forms an industry with other firms performing or producing complementary goods and services.

Firms may be small or large depending on capital outlay and the level of production .

Characteristic of small and large firms

The characteristics of small and large firms are summarised in the following:

Characteristics Of Small Firm

(1) small firms require small capital outlay
(2) they are mainly involved in primary production
(3) they require small capital due to low output of goods
(4) they usually employ few workers
(5) they employ simple techniques as most of the operations are normal
(6) they cannot take advantage of economies of scale
(7) they have no special or standard design for their product
(8) they may lack the resources to carry out research and publicity

Characteristics of large scales firms

(1) they require large capital
(2) they are mainly involved in secondary and tertiary production
(3) they require a large market because of their high output of goods
(4) they usually employ large numbers of workers
(5)they usually employ heavy techniques with machinery and equipment
(6) they can easily benefit from internal and external economies of scale
(7their product is subject to standardisation
(8)they usually embark on extensive research and publicity to enhance their efficiency .

Done studying? Use the questions below to assess your learning!

  1. What do you understand by economies and diseconomies of scale?
  2. State and explain the types of economies of scale.
  3. State the limitations to the scale of production or to the growth of firms.
  4. What are the advantages and disadvantages of small firm and large firm?

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