Economies of scale

 Isoquant is also called as equal product curve or production indifference curve or constant product curve. Isoquant indicates various combinations of two factors of production which give the same level of output per unit of time.
 Just as an indifference curve represents various combinations of two goods which give a consumer equal amount of satisfaction, an iso-product curve shows all possible combinations of two inputs physically capable of producing a given level of output. Since an iso-product curve represents those combinations which will result in the production of an equal quantity of output, the producer would be indifferent between them.
 This law was given by Alfred Marshall in his book principle of economics.
 It show particular pattern of change in output when some factor remain fixed.
 Production depend upon factors of production , if factors of production are good, production may increase and vice-versa.
 Production function show functional relationship between production and factors of production.
 It refers to manner of change in output cost by the increase in all the input simultaneously and in the same proportion.
 Returns refers to “change in physical output”
 Scale refers to “quantity of input employed”
 Change in scale means that all factors of production are increased or decreased in same proportion.
 The cost advantage that arises with increased output of a product.
 It arises because of the inverse relationship between the quantity produced and per-unit fixed cost.
 Profit refers to the excess of receipts from the sale of goods over the expenditure incurred on producing them.
 The amount received from the sale of goods is known as ‘revenue’ and the expenditure on production of such goods is termed as ‘cost’. The difference between revenue and cost is known as ‘profit’.
 For example, if a firm sells goods for Rs. 10 crores after incurring an expenditure of Rs. 7 crores, then profit will be Rs. 3 crores.

1. ECONOMIES OF SCALE 1

2. Economies of scale The cost advantage that arises with increased output of a product. It arises because of the inverse relationship between the quantity produced and per-unit fixed cost. 2

3. Types of economies of scale In the process of expansion, the producer may benefit from the emergence of economies of scale. These economies are classified into two types: Economies of scale Internal economies External economies 3

4. Internal economies of scale :- lower long run average costs resulting from a firm growing in size. External economies of scale :- lower long run average costs resulting from an industry growing in size. 4

5. Types of internal economies of scale As a firm increases its scale operation, there are number of reasons reasons responsible for a decline in average cost. These include: Buying economies Selling economies Managerial economies Financial economies Technical economies Research and development economies Risk bearing economies 5

6. Buying economies These are the best known type. Large firms that buy raw materials in bulk and place large orders for capital equipment usually receive a discount . This means that they have paid less for each item purchased. They may receive a better treatment because the suppliers will be anxious to keep such large customers. 6

7. Selling economies Every part of marketing has a cost – particularly promotional methods such as advertising and running a sales force. Many of these marketing costs are fixed costs and so as a business gets larger, it is able to spread the cost of marketing over a wider range of products and sales – cutting the average marketing cost per unit. 7

8. Managerial economies As a firm grows, there is greater potential for managers to specialize in particular tasks (e.g. marketing, human resource management, finance). Specialist managers are likely to be more efficient as they possess a high level of expertise, experience and qualifications compared to one person in a smaller firm trying to perform all of these roles. 8

9. Financial economies Many small businesses find it hard to obtain finance and when they do obtain it, the cost of the finance is often quite high. This is because small businesses are perceived as being riskier than larger businesses that have developed a good track record. Larger firms therefore find it easier to find potential lenders and to raise money at lower interest rates. 9

10. Technical economies 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 a more efficient form of production. A larger firm can also afford to invest more in research and development. 10

11. Research and development economies. A large firm can have a research and development department, since running such a department can reduce average costs by developing more efficient methods of production and raise total revenue by developing new products. 11

12. Risk-bearing economies. Larger firms produce a range of products. This enables them to spread the risks of trading. If the profitability of one of the products it produces falls, it can shift its resources to the production of more profitable products. 12

13. Types of external economies of scale Transportation and communication Skilled labour Facility of workshop Helping industry Research and experiment Banking facility 13

14. Transportation and Communication Concentration of firms provides better communication system for all. Rail, road facilities become available to all, the transport system reduces cost. 14

15. Skilled Labor With the concentration of firms skilled labour is available to all the firms because people living in the nearby areas get technical training. 15

16. Facility of Workshop Concentration of firms provides incentive for the technical persons to establish their workshops and hence, all the firms benefit from these, because they need not to incur costs in establishing the workshops. 16

17. Helping Industry This economy arises because of concentration of firms. In local industry it becomes possible to split up some of the processes which are taken over by specialist firms. For example in Faisalabad with the textile mills dying factories, designing centers, ginning factories and calendaring plants have been established. 17

18. Research and Experiment In local industry, research and development are centralized. Each individual firm needs not to spend a separate amount on research and development. They benefit from common pool. 18

19. Banking Facility The basic aim of a commercial bank is to maximize profits and for this they need deposits and provide credit to the traders, businessmen and Industrialists etc. In a localized industry or business centers bank opens their branches and all the firms benefit from banking and credit facility. The banking system helps in promoting trade and business. 19

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