Scale of Production – SS1 Economics Lesson Note (First Term)

Scale of production is the size of a firm’s productive capacity, or the size of the operation the firm adopts.

Behavioural objectives

1. Explain the meaning of scale of production.
2. Distinguish small-scale, medium-scale and large-scale production.
3. Define economies of scale and name its types.
4. List and explain the classes of internal economies.
5. State the disadvantages of large-scale production.
6. Explain external economies and external diseconomies.

What are the types of scale of production?

There are three scales of production: small-scale, medium-scale and large-scale, depending on the firm’s capacity.

Small-scale production

• Meaning: the productive capacity of the firm is small, so output of goods is small.
• Examples: a local tailor, a roadside provision shop, a small bakery.

Medium-scale production

• Meaning: output is larger than small scale but lower than large scale.
• Cost: cost of production per unit is usually lower than in small-scale production.

Large-scale production

• Meaning: the firm’s productive capacity is large, the output is large and the size adopted in production is big.
• Examples: a cement factory, a large bottling company, a big bank.

What are economies of scale?

Economies of scale are the advantages a firm enjoys when it expands its productive capacity, so that output rises and cost per unit of output falls.

• Source: the advantages may be internal to the firm or external to it.
• Result: a firm that increases output enjoys the benefits called economies of large-scale production.

What are the types of economies of scale?

There are two types of economies of scale: internal economies and external economies.

1. Internal economies: advantages that come from the growth of the firm itself. Their opposite is internal diseconomies.
2. External economies: advantages that come from the growth of the industry. Their opposite is external diseconomies.

What are internal economies of scale?

Internal economies are the advantages a firm obtains as a result of an increase in its own size and the expansion of its output.

• They are also called the economies of large-scale production.
• As the firm expands, efficiency rises and the cost per unit of output falls.

What are the classes of internal economies?

There are seven classes of internal economies: financial, managerial, technical, welfare, marketing, risk-bearing and research.

1. Financial economies: 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: a large firm can employ highly qualified and competent personnel.
   • These skilled employees raise the efficiency and productivity of the organisation.
3. Technical economies: the use of modern machines, together with technical experts who handle them for positive results.
4. Welfare economies: a large firm can raise the efficiency of labour by improving working conditions.
   • Examples are canteens, recreational facilities and medical facilities.
5. Marketing economies: a large firm can buy raw materials in bulk.
   • It can also produce goods in large quantities and distribute them to many areas where they are needed.
6. Risk-bearing economies: a large firm can spread its risks.
   • When the business environment is unstable, it can withstand any loss or liability.
7. Research economies: a large firm can set up its own laboratories and run research and development programmes.
   • This can lead to new inventions and better, cheaper methods of production.

What are internal diseconomies of scale?

Internal diseconomies are the disadvantages a firm suffers as a result of its own expansion.

• They bring less efficiency and a higher cost per unit of output.
• They arise mainly from managerial problems.

What are the disadvantages of large-scale production?

• Delay in decision-making: as the firm grows, decisions take longer to reach.
• Less personal relationship between workers and management: the rapport and interaction that existed when the firm was small are no longer present.
• Difficulty in coordination and control of staff: it becomes hard to coordinate and control a large workforce.
• Overproduction and resource wastage: goods can be overproduced, so resources are wasted.
• Slow response to change: large firms take a long time to change their methods of production or respond to changes in the market.

What are external economies of scale?

External economies are cost-saving advantages enjoyed by firms in the same industry because of the growth or localisation of that industry.

• A firm gains lower costs and higher output because of help it receives from other firms, especially through their products.

What are the classes of external economies?

There are five classes of external economies: by-products, technical, finance, infrastructural and research.

• Economies of by-products: waste from one firm becomes raw material for another, for example sawdust from sawmills used by other firms.
• Technical economies: firms in one area share skilled labour and technical services.
• Finance economies: banks and other financial institutions set up near the industry and serve the firms easily.
• Infrastructural economies: firms share facilities such as roads, electricity and water supply.
• Research economies: firms share the results of research carried out by research bodies or trade associations.

What are external diseconomies of scale?

External diseconomies are the increased costs a firm faces as it raises output, caused by effects outside the firm.

• Congestion: too many firms in one area cause traffic jams and delays.
• Higher rents and land prices: demand for land in the industrial area pushes costs up.
• Pressure on facilities: roads, power and water become overstretched.
• Higher input costs: competition for labour and raw materials raises wages and prices.

What is the difference between internal and external economies?

• Internal economies: gains that arise inside one firm because of its own expansion.
• External economies: gains that arise outside the firm because the whole industry has grown or is located together.

Evaluation

1. What is meant by scale of production?
2. Distinguish between small-scale, medium-scale and large-scale production.
3. List the seven classes of internal economies.
4. State four disadvantages of large-scale production.
5. What are external economies?

Assignment

Define economies of scale, name its two types, and explain any four internal economies with one example each.