If they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs Big organisations often suffer from the debilitating effects of internal politics, information over-load, complex bureaucracy, unrealistic expectations among managers and cultural clashes between senior people with inflated egos. Too Big for Economy Above a certain size, business operations start becoming inefficient. This raises the prices of raw-materials and other factors of production. Research and development economies: A large firm can have a research and development department, since running such a department can reduce average costs by developing more efficient methods of production and raise total revenue by developing new products. A was just as likely to steal customers from another make, such as an , as it was to steal customers from other companies. This system also avoids shortage of essential materials.
After it is necessary to mine deeper seams to produce more ore, the cost of additional output will rise. Usually, technical economies arise for large scale firms with large-scale production. Economies of specialization : Various firms can introduce division of labor and specialization. No methods of production can be invented and informed to the producers. Thus, it enjoys the economy of the use of byproducts.
Managerial Economies On the managerial side also, economies can be achieved; when output increases, specialists can be more fully employed. For instance, employers may choose to offer higher wages and charge higher prices if they are in an affluent area. Internal economies are due to the expansion of individual firm while external economies arise due to the growth of the entire industry. External economies are a pre-requisite for the growth of backward regions. They result from an increase in the scale of output of the firm, and cannot be achieved unless output increases. For instance the use of common facilities such as transportation; use of attracted to the area; banking and insurance services attracted to the area, water, electricity and others.
The scale of production has an important bearing on the cost of production. Time lags in the flow of information can also create problems in terms of the speed of response to changing market conditions. It is worth nothing that as commercial and technical education spreads, and other such developments take place, the field of internal economic is being narrowed and that of external economies is being widened. These firms divide the work into different processes and appoint various specialists to the work which results in more efficient and error free production. There is also diversification of markets, of sources of supply, and of processes of manufacture.
Internal Economies are the economies which are related to the particular firm. Similarly, service companies are limited by available labor and thus tend to concentrate in large, densely-populated metropolitan areas ; science, technology, engineering, and mathematics professions are often-cited examples. Motive of self-interest lacks in large firms. Full use of them can be made only, when production is carried on a large scale. For example, the textile mills in Bombay, Surat and Baroda are producing different varieties of clothes. For instance, promotional and advertising campaigns are one of the priciest things in business. If you sell 50,000, the cost per widget is much lower.
Similarly, by directly selling the product to the final consumers, the firm, on one hand, saves the expenses on intermediaries. Since the large firm purchases its requirements in bulk, it can bargain on its purchases on favorable terms. Further, a firm operating at a large scale can also have reserve capacity in their plants, machinery and other equipments. As manufacturing firms grow, the cost per item typically shrinks. The special treatment may be in the form of freight concessions from transport companies, adequate credit from banks and other financial treatments etc.
For instance, if an electricity generating plant has the optimum capacity of 1 million Kilowatts of power; it will have lowest cost per unit when it produces 1 million Kilowatts. It then passes the savings onto you. They can derive many benefits by jointly establishing the research. For example, only well established big school can have specialized teachers. Large businesses have bargaining advantages and are accorded a preferential treatment by the firms they deal with.
It is called economy of increased dimensions. Secondly, the bigger the machine the more economical it is, e. Diseconomies of scale result in rising long run average costs which are experienced when a firm expands beyond its optimum scale, at Q. This may help to explain why Oldsmobiles were discontinued after 2004. There is very possibility of external economies to be reaped when a young industry grows in a new territory.