Scale Of Production SS1 Economics Lesson Note

This simply means the size of a firm’s productive capacity.

The scale of production also refers to the size of the operation adopted by the firm. A firm can be small-scale or medium scale or large scale depending on its capacity.

1. Small-scale production: This occurs when the productive capacity of a firm is small. There is a small output of goods.
2. Medium scale production: This occurs when the output is larger than small scale but lower than large scale. It has a lower cost of production than small-scale
3. Large-scale production: It means that the firm’s productive capacity is large. The output is large and the size adopted in production is big.

As a firm increases its output it will enjoy some benefits referred to as economies of large scale production.

ECONOMICS OF SCALE

Economies of scale can be defined as the growth of a firm as a result of the expansion of the volume of productive capacity resulting in an increase in output and a decrease in its cost of production per unit of output. These are the advantages both internal and external which a firm enjoys when it expands the size of output.

Types of Economies Of Scale

1. Internal economies and internal diseconomies.
2. External economies and external diseconomies.

• INTERNAL ECONOMIES OF SCALE

Internal economies, also known as the economies of large-scale production are the advantages a firm devices or obtains as a result of its increase in size and expansion of its output.

As the size of the firm increases or expands, this will lead to greater efficiency and a resultant fall in the cost per unit of output.

CLASSIFICATION OF INTERNAL ECONOMICS

1. Financial Economies: This simply means the ability Of a firm to secure funds cheaply and easily from financial institutions to finance its operation. The major sources of funds are borrowing from financial institutions and issuing debentures and shares.
2. Managerial Economies: As a firm’s scale of operation increases, it can employ highly qualified and competent personnel. These skilled employees will contribute a lot to the efficiency and productivity of the organization.
3.  Technical Economies: This is the application of modern machines coupled with the employment of technical experts who handle these machines for positive results.
4. Welfare Economies: A large firm can raise the efficiency of labour by improving the conditions under which people work by providing them with canteens, recreational facilities, medical facilities, etc.
5. Marketing Economies: A large firm can buy raw materials in bulk, produce them in large quantities and distribute them to many areas where they are required.
6. Risk Bearing Economies: A large organization can spread its risks. When there is instability in the business environment they can withstand any loss or liability.
7. Research Economies: Large organizations can establish their laboratory and carry out research and developmental programs. This will lead to new inventions and possibly better and cheaper methods of production.

INTERNAL DISECONOMIES

Internal diseconomies on the other hand can be defined as the disadvantages which a firm undergoes as a result of expansion, resulting in less efficiency and an increase in the cost per unit of output as a result of managerial problems.

DISADVANTAGES OF LARGE SCALE PRODUCTION

1. Delay in decision-making: As a firm grows in size, the decision-making process will take longer time.
2. Less personnel relationship between workers and management: As a firm grows in size the rapport and interaction that existed when it was small is no more present.
3. Difficulties In coordination and control of staff: When a firm grows in size, it might be very difficult to coordinate and control the staff
4. Overproduction and Resource Wastage: One major disadvantage of large-scale production is the fact that resources can be wasted in production. This is because goods can be overproduced.

Large firms take a long time to change their methods of production or to respond to changes in the market. Time is usually wasted before final decisions are reached.

• EXTERNAL ECONOMIES 

External economies are cost-saving advantages which can be enjoyed only by the firms in the same industry. There are benefits due to the localization of the industry. In other words, External economies are the advantages a firm derives from an increase in its output and a decrease in costs due to help the firm receives from other firms, especially in the use of their products.

CLASSIFICATION OF EXTERNAL ECONOMIES SCALE

1. Economies of by-products
2. Technical economies
3. Finance economies
4. Infrastructural economies
5. Research economies

External Diseconomies

External diseconomies on the other hand are the increased costs a firm will experience as a result of increasing its output resulting from external effects.

ASSIGNMENT 

1. What do you understand by economies of scale:
2. Explain types of economies of scale
3. Write short notes on

Small scale production

Medium-scale productionLarge-scale production.

4. Explain the internal economy of scale.