Internal Economies of Scale, Definition and Types

Fri, 10/19/2012 - 08:19 -- Umar Farooq

Definition is Internal Economies of Scale

"Internal economies are those economies in production which occur to the firm itself when it expands its output or enlarge its scale of production".

Types of Internal Economies of Scale

Folllowing are the types of Internal economies of scale:

1. Administrative or Managerial Economies

2. Technical Economies

3. Marketing Economies or Commercial Economies

4. Indivisibility

5. Financial Economies

1. Administrative or Managerial Economies

When a firm expands its output or enlarges the scale of production it follows the principle of division of labour and creates special departments e.g. marketing, production, cost, processing cost accountant, marketing manager etc. and as a result production process works smoothly. The entrepreneur gives attention to more important jobs e.g. import and export problems, credit from banks and concessions from the government etc. The administrative expenditures do not increase proportionally with the output and thus the firm benefits.

2. Technical Economies

Technical economies arise due to the large scale production because there is a mechanical advantage in the use of large machines. Technical economies may arise due to large size of the plant because it requires less energy, less staff, and proportionately less cost of installing the plant. Specialized persons can only be employed with large machinery and plant. Thus, large scale producer benefits from specialists.

3. Marketing Economies Or Commercial Economies

These economies arise from the purchase of raw material and sale of finished goods. When output of a firm increases, it purchases large quantity of raw material and gets preference by the firms they deal with e.g., freight concession, cheap credit and prompt delivery etc.

4. Indivisibility

We can get total benefit from most of the factors of production when they are being used at full capacity. If smaller output is being produced it means that they are not working according to their efficiency. This may be due to indivisibility of factors of production.

5. Financial Economies

Another type of internal economies of scale is financial economies, these may arise due to the reason that large scale firms have better credit facilities i.e. credit at cheaper rates, concession from the government for credit

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