A.9] Economies of Scale

A.9.1] Definition and Concepts

• Definition: Economies of scale refer to the cost advantages that a business obtains due to expansion in scale of production.
• Key Concept: As output increases, the average cost per unit decreases.

A.9.2] Internal vs External Economies of Scale

A.9.3] Types of Economies of Scale

• Technical Economies:

  • Achieved through the use of advanced machinery and technology.
  • Example: Large-scale production using automated systems reduces per-unit costs.

• Managerial Economies:

  • Result from improved management practices and specialization.
  • Example: Division of labor and efficient management reduces overheads.

• Financial Economies:

  • Access to cheaper capital due to large size.
  • Example: Lower interest rates on loans for large firms.

• Marketing Economies:

  • Reduced marketing costs per unit due to large-scale advertising.
  • Example: Bulk advertising campaigns for mass markets.

• Purchasing Economies:

  • Lower prices for raw materials due to bulk buying.
  • Example: Bulk purchasing from suppliers reduces input costs.

• Risk-Bearing Economies:

  • Ability to spread risks over a larger scale.
  • Example: Diversified product lines reduce financial risk.

A.9.4] External Economies of Scale

• Definition: Benefits that accrue to all firms in an industry due to the growth of the industry.
• Examples:
  • Improved infrastructure (roads, ports, railways)
  • Availability of skilled labor
  • Better access to raw materials
  • Shared research and development

A.9.5] Internal vs External Economies of Scale

A.9.6] Importance in Competitive Exams (SSC, RRB)

• Frequently Asked Questions:

  • What are the types of economies of scale?
  • Differentiate between internal and external economies of scale.
  • Give examples of technical and managerial economies.
  • How do external economies benefit the industry?

• Key Terms to Remember:

  • Average cost per unit
  • Bulk purchasing
  • Specialization
  • Technological advancement
  • Infrastructure development
  • Risk diversification

A.9.7] Summary Table

A.9.8] Context and Examples

• Context: Economies of scale are crucial for firms aiming to reduce costs and increase competitiveness.
• Example: A car manufacturing company may benefit from economies of scale by producing more units, thus reducing the cost per car.

A.9.9] Common Exam Questions

• What is the main advantage of economies of scale?

  • Reduction in average cost per unit.

• Which type of economy is achieved through bulk purchasing?

  • Purchasing economies.

• What is an example of external economies of scale?

  • Improved infrastructure in an industry.

• Differentiate between internal and external economies of scale.

  • Internal: Within the firm; External: Within the industry.

A.9.10] Quick Revision Notes

• Definition: Cost advantages from increased production scale.
• Internal: Within the firm (e.g., technology, management).
• External: Industry-wide (e.g., infrastructure, labor).
• Types: Technical, managerial, financial, marketing, purchasing, risk-bearing.
• Examples: Bulk buying, automation, shared R&D, improved transport.

A.9.11] Important Dates and Terms

• No specific dates are associated with economies of scale.
• Key Terms: Average cost, bulk purchasing, specialization, technological advancement, infrastructure development, risk diversification.