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Costs of production


Scale of Production – Economies and Diseconomies of Scale The size of an individual firm has an important influence on the operating efficiency of that firm=
Scale of Production – Economies and Diseconomies of Scale The economies and diseconomies experienced by an individual firm as it grows are called the internal economies and diseconomies of scale=
Internal Economies of Scale 1. Specialisation of labour: as a firm grows in size, each worker will be able to specialise in one particular task instead of dividing his time between a number of different jobs=
Internal Economies of Scale 2. Use of the machinery: with large scale production and increased specialisation of labour it is possible for a firm to use machinery more economically=
Internal Economies of Scale 3. Marketing economies: as a firm grows it will purchase and sell stock in larger quantities. Bulk purchasing may result in larger discounts from suppliers=
Internal Economies of Scale Continuity of the production process: a large firm will find it easier to arrange production into one continuous process from the initial stages to the final output=
Internal Economies of Scale 5. Large offices and factories cost less per cubic foot to erect than smaller ones. This is due to the fact that there are certain fixed costs in the initial stages=
Internal Economies of Scale 6. The bulk purchase: of building materials may result in substantial discounts=
Internal Diseconomies of scale 1. Decision-making: as a firm grows in size, the lines of authority and chains of responsibility become less clearly defined=
Internal Diseconomies of scale 2. Staff morale: as a firm grows and the workers within it become more specialised, their morale suffers due to the monotonous and repetitive nature of the specialised tasks they are performing=
Internal Diseconomies of scale 3. Communication problems: as a firm grows in size, communication becomes more difficult due to greater numbers of employees and more complex lines of authority=
Internal Diseconomies of scale 4. Administration overheads: as a firm expands, its administration costs will usually increase at a faster rate than its output=
External Economies of scale 1. Disintegration: when an industry becomes large enough, one process may be isolated and performed on a large scale by a specialist firm=
External Economies of scale 2. Subsidary trades: as an industry grows, subsidary trades will develop locally to service the expanding industry. The growth of subsidary trades benefits all the firms within a particular industry=
External Economies of scale 3. Specialised services: when an industry becomes very large, research and development agencies may be set up to provide facilities for the individual firms within the industry=
External diseconomies of scale (disadvantages) 1. Shortages of factors of production: (a) As an industry expands, scarcities of factors of production, particularly skilled labour, leads to increased labour costs or the employment of less suitable workers=
External diseconomies of scale (disadvantages) 2. Raw material shortage: pressure will be put on the supply of raw materials with increased demand and a possible shortage may arise=
External diseconomies of scale (disadvantages) 3. Infrastructural problems: as an industry expands, its demand for infrastructure=



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