Question

Explain the internal and external economies of scale.

Answer 1

The scale of production is an important factor affecting production. Every producer wishes to reduce the costs of production by using economies of scale.
Marshall classified economies into two.

Internal economies of scale: Internal economies refer to the reduction in the cost of production of the commodity. They are of various types.

1. Technical economies: When the size and capital of the firm are large, up-to-date technologies can be used to improve the productivity of the firm. Here research and development strategies can be applied easily.
2. Financial economies: Big firms can float shares in the market for capital expansion, while small firms cannot do so.
3. Managerial economies: Large-scale production facilitates specialization and delegation.
4. Labour economies: Large-scale production implies greater and minute division of labour. This leads to specialization which enhances the quality. This increases the productivity of the firm.
5. Marketing economies: The producers can both buy raw materials in bulk at a cheaper cost and can take the products to distant markets.
6. Economies of survival: Product diversification is possible and it reduces the risk in production. Even if the market for one product collapses, the market for other commodities offsets it.