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Scale Of Production - PART I

Scale of Production - PART I


            The scale of production denotes to the aspects used the quantities of commodities produced and the techniques of production adopted by a producer. As production enhances, with the augment in the quantities of land, labour and capital, the scale of production expands.

            Production may be carried on a small scale or on a large scale by a concern. When a concern functions by using less capital and small quantities of other aspects of production, the scale of production is said to be small.

            Alternatively, a firm using more capital and larger quantities of other aspects is said to be operating on a large scale. The scale of production of an industry expands with the increase in the number of firms in the industry, or and with the increase in the size of the firms in it.

Economies of Large Scale Production

            Economies of large scale production have been classified by Marshall into Internal and Economies and External Economies. Internal economies are internal to a firm when its costs of production are reduced and output increases. They “Open to a single factory or a single firm independently of the action of the other firms. They result from an increase in scale of output of the firm and cannot be achieved unless output increases. They are not the result of inventories of any kind but are due to the use of known methods of production which a small firm does not find worthwhile.”
            External economies are external to a firm which are available to it when the output of the whole industry amplifies with the expansion of the industry itself. They are “shared by a number of firms or industries when the scale of production in any industry or group or industries increases. They are not monopolised by a single firm when it grows in size but are conferred on it when some other firms grow larger.”

(A) Internal Economies – Their Causes and Types

Causes – Internal economies will occur to a concern when it enlarges and are caused by two factors which are discussed as follows. They are (1) Indivisibilities, (2) Speculations.

  1. Indivisibilities – Many fixed factors of production are indivisible in the sense that they should be used in a fixed minimum size. Such “factors of production can be most efficiently employed at a fairly large output, but work less efficiently at small outputs because they cannot be divided into smaller units.” Thus as output increases, the indivisible factors which were being used below capacity can be utilised to their whole capacity thereby reducing costs. Such indivisibilities arise in the case of labour, machines, marketing finance and research.

  2. Specialisation – Division of labour which leads to specialisation is another cause of internal economies. When a firm expands in size, not only its production increases, but the amount of input and the number of labourers also amplify. The requirement of division of labour whereby each labourer is assigned one specific job and the splitting up of processes into sub-processes for greater efficiency.

Types of Internal Economies

  1. Technical Economies – Are those which occur to a concern from the employment of good equipments and techniques of production. As a consequence production amplifies and the per unit cost of manufacture drops. It is further divided into five classes such as Economies of Superior techniques, Economies of increased dimension, Economies of linked processes, Economies of use of by-products and Economies of increased specialisation.

  2. Marketing Economies – A huge concern also reaps the economies of trading. It purchases it requirements of various raw materials in lump sum and is hence capable to safe them at constructive terms in the form of better quality inputs, prompt delivery, transport concessions etc.

  3. Managerial Economies – A huge concern can afford to employ experts to oversee and control a variety of departments. There may be a separate head for manufacturing, assembling, packing, marketing and general administration etc. This directs to functional specialisation which increases the productive efficiency of the concern.

  4. Financial Economies – A huge firm can acquire cheap and timely finance both from banks and the market since it possesses huge assets and goodwill. It can also bring in additional capital by issuing shares and debentures in the capital market.

  5. Risk Bearing Economies – A huge firm is in a better position that a small firm is spreading its jeopardy. It can make various articles and sell them in diverse regions. By the diversification, of its articles, the huge concern is proficient in plummeting risks by counter balancing the loss of one product by the gain of the other.

  6. Economies of Research – A huge concern holds larger resources than a small concern and can institute its own research laboratory and employ trained research workers. When they invent new production techniques or progression the latter become the property of the firm which utilises them for increasing its output and reducing costs.

  7. Economies of Welfare – All concerns have to give welfare facilities to their workers. But a large concern with its large resources can provide better working conditions in and outside the factory. Though the expenses on such facilities are very heavy yet they tend to increase the productive competence of the workers which helps in improving production and reducing costs.
 (B) External Economies

External economies profit all firms within the industry as the size of the industry expands. Such economies accrue to concerns when the industry is localised in a particular region makes innovations and evolves specialisation.

  1. Economies of Concentration – When an industry is focused in a specified region all the member concern harvest some widespread economies. Skilled workers are available to all firms. Modes of transport and communications are considerably improved. The industry may ask the railway authorities for additional facilities for more wagons, loading and unloading etc.

  2. Economies of Information – An industry is in good status to establish research labs than a huge concern since it is capable to pool larger resources. It can employ highly paid and more experienced research personnel. The fruits of their in the form of novel innovations are passed on the concerns through a scientific journal.

  3. Economies of Welfare – Relating to a huge concern an industry is in a more advantageous status to give welfare facilities to the labourers. It may get land at concession rates and acquire facilities from the municipal corporation of the region for setting up housing colonies for the labourers, public health and amusement facilities.

  4. Economies of Specialisation – The concern is an industry may also harvest the economies of specialisation. When an industry enlarges in size, concerns begin specialising various processes and industry benefits as a whole.

(C) Relation Between Internal and External Economies

  1. The relation amidst internal and external economies is only of one grade. For instance, concerns may be benefiting external economies but if they coalesce mutually then all economies turn into internal for them.
  1. Yet again, an internal economy harvested by a concern turns into external to some other concern if it uses the same. For instance, if molasses are used by sugar industry for producing spirit, it is an internal economy.
  1. However if any other concern purchases molasses for producing spirits it is an external economy to the purchasing concern.
  1. As denoted by Mrs.Robinson, “Economies of large scale industry are likely to have the effect of altering the optimum size of the firm, and the reorganisations of the firm to adapt itself to the new optimum size may lead to further economies.”
  1. These have been explained by Mr.Robinson as internal-external economies. They are internal economies for the reason that they depend upon the dimension of the concern and external economies for the reason they depend upon the dimension of the industry.

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