Types Of External Economies Of Scale Of Production

Large scale production has several economies. Professor Marshall classified economies of large scale production into two types, namely internal economies of scale and external economies of scale. Here we are going to discuss the external economies of scale.

Economics accrued due to the expansion of industry are described as external economies. These economies of scale arise due to the concentration of industries at a particular place. Generally expansion in the size of firms leads to the expansion of industry and creation of external economies of scale. External Economies of scale are of mainly three types. They are mentioned as follows:

1. Economies of Concentration : When the industry grows in size, all the firms in the industry get the following economies –

a) Supplementary industries are established in that area.

b) Transport facilities are developed and cost of transport decreases.

c) Credit facilities are available due to the establishment of banks and other financial institutions.

d) Laborers are available without difficulty since skilled laborers migrate to that area.

e) Electricity is provided at cheaper rates.

f) Demand for machinery will increase as large sized machines are used by the firms. .

g) Communication facilities will also develop.

2. Economies of information : External economies also include economies of information. Research laboratories can he started and experiments can be initiated on common problems faced by the firms. No methods of production can be invented and informed to the producers. Trade Journals can be published and circulated among the businessmen information regarding the availability of raw-materials, marketing prospects, export possibilities etc. can be informed through the trade journals. Special meetings and conferences can be organized and solutions to various problems can be  known.

3. Economies of specialization : Various firms can introduce division of labor and specialization. They can produce variety of products. Specialization on vertical and lateral lines brings several advantages to the industry. For example, the textile mills in Bombay, Surat and Baroda are producing different varieties of clothes. This leads to an improvement in quality and decrease in cost of production. In may be remembered that exact classification of economies into internal and external is not possible. External economies of scale accrued to a firm may become internal economics to another firm. For example, the development of electricity is an external economy to a firm utilizing it. But it will be considered an internal economy to a firm generating electricity. In this way internal economies may lead to external economies of scale or external economies may lead to internal economies. They influence one another to a great extent.

Disadvantages of large scale production :

Large scale production has certain disadvantages. They are explained as follows –

1 ) Supervision over different activities done by different workers at various stages is a difficult task in a large firm.

2) It becomes a difficult task to achieve co-ordination between the  activities of workers with every increase in the size of the large firm.

3) Decisions arc not taken promptly.

4) Managerial efficiency may fall due to the existence of large number of shareholders. No single person enjoys complete rights over the firm. Motive of self-interest lacks in large firms.

5) Relations between the employers and laborers are not sound. There exists no direct contacts between the employers and laborers. As a result, strikes and lockouts  frequently take place.

6) Monopolistic tendencies may develop due to the prevalence of large firms. Economic power is concentrated in a few hands. Inequalities increase due to the improper distribution of income.

7) Consumers are compelled to pay higher prices for different commodities due to the monopolistic tendencies.

8) Large scale in production generally depends on the level of exports. If exports fall due to any unforeseen reason, there prevails instability in the entire industrial economy. In this way large scale industrial production has both advantage and disadvantages. But on the whole, the advantages are more than those of disadvantages in the large scale production.

Internal economies may lead to external economies of scale or external economies may lead to internal economies. They influence one another to a great extent.

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