Economies of Scale Essay Example | Topics and Well Written Essays - 2500 words

Economies of Scale - Essay Example This concept is popularly known as 'Economies of Scale'. Many firms in different sectors of the economy are experiencing the economies of scale by virtue of expanding their economic activities to a greater level. The economies of scale may be internal or external. Internal economies of scale are experienced within the same firm while external economies of scale are experienced in the same industry. In this paper the internal economies of scale are discussed in detail in the Section-I. Subsequently disadvantages of the economies of scale for a firm as well as for the consumers of the firms experiencing economies of scale are described in the section-II and III. Finally the implications of the regulatory authorities on the concept of 'minimum efficient scale' has been described in section-IV. If the average cost per unit of input falls per unit increase in the output, then the firm is said to be enjoying the internal economies of scale. This in other words it can be expressed as a percentage change in all inputs leads to a greater percentage change in outputs. Here average total cost (ATC) first decreases because fixed cost such as buildings, equipments and management expenses remains constant and have been utilized to their optimum. The total cost is spread over a greater range of outputs. This increasing returns to scale is achieved till an optimum level after which any increase in the quantity of input, the average total cost(ATC) increases showing the diseconomies of scale. Firms which generally require large capital investments show economies of scale. This internal economies of scale is of five types, such as technical, commercial, managerial, financial and risk bearing economies. The pattern of the economies of scale is shown in the figure- 1. Figure-1: Various types of economies of scale (Source: http://www.bized.co.uk/educators/16-19/economics/firms/presentation/scale_map.htm ) There are various factors as shown in the figure-1 contributes to different economies of scale. Each factor has got significance for reduction in average cost of production thus making the output cheaper. Technical: Technical economies are when improved techniques benefits a firm to increase its production to a large extent. "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 more efficient form of production" ( tutor2u.net). This technical economies of scale is achieved due to several factors, such as: Indivisibility of Plant:- Due to imperfect divisibility of factors the economies of scale occur and the long-run average cost falls because of this indivisibility of factors (Kaldor & Robinson, cited by Ahuza, 2004). In this case most of the factors are 'lumpy' i.e. they are available in large indivisible units which can therefore yield lower cost of production when they are used to produce a large output. Here example can be given of telecommunication industry where the initial investment in infrastructure is too high. So by increasing a larger clientele base only the fixed cost can be spread over and increasing return to scale may be seen. Likewise another example is radio-dispatching technology used by the police officers. The cost of installing the technology is about the same no