Managerial Economics - Cost Analysis
Economies Of Scale - Cost Analysis
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Economies of scale exist when long run average costs decline as output is increased.
Economies Of Scale
Economies of scale exist when long run average costs decline as output is increased. Diseconomies of scale exist when long run average cost rises as output is increased. It is graphically presented in the following graph. The economies of scale occur because of (i) technical economies: the change in production process due to technology adoption. (ii) Managerial economies (iii) purchasing economies, (iv) marketing economies and (v) financial economies.
Economies of scale means a fall in average cost of production due to growth in the size of the industry within which a firm operates.
There are various factors influencing the economies of scale of an organization. They are generally classified in to two categories as Internal factors and External factors.
1. Labour economies: if the labour force of a firm is specialized in a specific skill then the organization can achieve economies of scale due to higher labour productivity.
2. Technical economies: with the use of advanced technology they can produce large quantities with quality which reduces their cost of production.
3. Managerial economies: the managerial skills of an organization will be advantageous to achieve economies of scale in various business activities.
4. Marketing economies: use of various marketing strategies will help in achieving economies of scale.
5. Vertical integration: if there is vertical integration then there will be efficient use of raw material due to internal factor flow.
6. Financial economies: the firm’s financial soundness and past record of financial transactions will help them to get financial facilities easily.
7. Economies of risk spreading: having variety of products and diversification will help them to spread their risk and reduce losses.
8. Economies of scale in purchase: when the organization purchases raw material in bulk reduces the transportation cost and maintains uniform quality.
1. Better repair and maintenance facilities: When the machinery and equipments are repaired and maintained, then the production process never gets affected.
2. Research and Development: research facilities will provide opportunities to introduce new products and process methods.
3. Training and Development: continuous training and development of skills in the managerial, production level will achieve economies of scale.
4. Economies of location: the plant location plays a major role in cutting down the cost of materials, transport and other expenses.
5. Economies of Information Technology: advanced Information technology provides timely accurate information for better decision making and for better services.
6. Economies of by-products: Organizations can increase the economies of scale by minimizing waste and can be environmental responsible by using the by- products of the organization.
Economies of scale exist when long run average costs decline as output is increased. Diseconomies of scale exist when long run average cost rises as output is increased. It is graphically presented in the following graph. The economies of scale occur because of (i) technical economies: the change in production process due to technology adoption. (ii) Managerial economies (iii) purchasing economies, (iv) marketing economies and (v) financial economies.
Economies of scale means a fall in average cost of production due to growth in the size of the industry within which a firm operates.
Factors Causing Economies Of Scale:
There are various factors influencing the economies of scale of an organization. They are generally classified in to two categories as Internal factors and External factors.
Internal Factors:
1. Labour economies: if the labour force of a firm is specialized in a specific skill then the organization can achieve economies of scale due to higher labour productivity.
2. Technical economies: with the use of advanced technology they can produce large quantities with quality which reduces their cost of production.
3. Managerial economies: the managerial skills of an organization will be advantageous to achieve economies of scale in various business activities.
4. Marketing economies: use of various marketing strategies will help in achieving economies of scale.
5. Vertical integration: if there is vertical integration then there will be efficient use of raw material due to internal factor flow.
6. Financial economies: the firm’s financial soundness and past record of financial transactions will help them to get financial facilities easily.
7. Economies of risk spreading: having variety of products and diversification will help them to spread their risk and reduce losses.
8. Economies of scale in purchase: when the organization purchases raw material in bulk reduces the transportation cost and maintains uniform quality.
External Factors:
1. Better repair and maintenance facilities: When the machinery and equipments are repaired and maintained, then the production process never gets affected.
2. Research and Development: research facilities will provide opportunities to introduce new products and process methods.
3. Training and Development: continuous training and development of skills in the managerial, production level will achieve economies of scale.
4. Economies of location: the plant location plays a major role in cutting down the cost of materials, transport and other expenses.
5. Economies of Information Technology: advanced Information technology provides timely accurate information for better decision making and for better services.
6. Economies of by-products: Organizations can increase the economies of scale by minimizing waste and can be environmental responsible by using the by- products of the organization.
Tags : Managerial Economics - Cost Analysis
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