Large scale production is the result of industrialization and modern technique 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 internal economies of scale.
Internal Economies of Scale
Internal economies of scale refer to those economies secured by a firm due to an increase in its size of production. These economies are enjoyed by the concerned firms only. The larger the expansion of the size of production of firms, the greater will be the internal economies secured by a firm. Hence internal economies of scale are directly influenced by and related to the productive size of a firm. Internal economies are of several types. They are explained as follows.
Types Of Internal Economies Of Scale
1. Technical economies: These economies arise due to the introduction of technical reforms in the organization of a firm. When the firm is growing, it can install up to-date and latest machinery. It can improve its methods of production. New machines can be installed in the place of old machines. Mechanization leads to decrease in costs and increase in production.
2. Managerial economies: A large firm can employ meritorious and skilled laborers in all branches of production. It can introduce division of labor and specialization in the day-to-day organization of the firm. As a result it can reap the profits of division of labor and specialization. Quality and quantity of output per worker can be increased. Cost of production can he minimized. Energy and time of worker can be saved.
3. Economy of materials: A large firm can utilize its materials by producing in an economical manner. For example a sugar mill can use its waste product, molasses for manufacturing Alcohol by starting a separate unit for that purpose. Similarly a diary unit can utilize the split milk for preparing sweets and biscuits. A paper firm can utilize its waste products for manufacturing inferior quality paper.
4. Economy of integration: A large firm can integrate or link the different stages of production. In doing so, it secures considerable profits. For example a Pharmaceutical firm producing drugs and tonics can transport and distribute its products by buying a van. Similarly a sugar mill owner can produce the necessary sugarcane by himself. So integration of production, marketing and distribution stages will bring huge Profits.
5. Economy of Marketing: A large firm can also secure economies of marketing. It can buy the required raw-materials at cheaper prices. I can also raise the demand for its output through a proper publicity, advertisement and salesmanship. By increasing the quality of its products, it can get huge profits.
6. Financial Economies: A large firm can secure credit without any difficulty. It can get loans from banks and other institutions at cheaper rates of interest. Similarly it can sell shares and debentures in the open market. It can also take back a portion of its profits for investment purpose. It can overcome any financial crisis by using the reserve funds.
7. Risk taking economies: Generally a large firm can rake risk and bear uncertainty in business affairs. By adopting product differentiation, it can dispose of its Products in the market. It produces different types of commodities and supplies them to different markets. It can recover any loss in one market with the gains coming from other markets. It can secure domestic as well as foreign markets for its products. Diversification in production and marketing sectors increases the ability of firm to withstand losses. It enjoys financial stability.
8. Economy of Research: A large firm can spend considerable amounts on research and experimentation. It can establish its own laboratory and employ well-trained research experts. It can invent new methods of production and new products. This is possible due to the expansion of the size of a production firm.
9. Economy of increased dimensions: It is a known fact that the cost operating large machines is less than of operating small machines. Increase in dimensions of certain machines brings economies. For example, the construction of a double Decker bus requires less expenditure with compared to two single Decker buses. Thus a large firm can get economies due to increased dimensions
10. Welfare economies: A large firm can adopt more welfare schemes for promoting the interest of its workers. This makes the workers to show more interest in their work.
11. Economy of Indivisibility: Some factors of production are indivisible. Their size can’t, be reduced alter a minimum size. Machinery, marketing and finance are examples of some indivisible factors. A large firm can utilize the optimum capacity of its machinery. When demand for its products increase, the same machinery can be used for producing more output. This leads to decrease in cost of production. Similarly, expenses incurred on marketing, advertisement, propaganda and publicity can also be minimized by a large firm. Hence, a large firm will be able to secure the economies of indivisibility.
12. Economy of fixed costs: A large firm can secure the economy of fixed costs. In the case of building and machinery, insurance etc, Fixed costs remain the same even though level of production was increased. As a result, the average fixed costs of a large firm will decrease.
