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Economies And Dis-Economies Of Scale

Referencing Styles : APA | Pages : 1

Economies of Scale: Economies of scale can be defined as the cost advantage which an organization can attain upon expanding its line of production during the long run. In other words, economies of scale are regarded as the advantages relating to the large scale production of organization. The cost advantages can be attained through the lower average cost per unit. During the long run concept. Economies of scale is attained where there are rise in the sales of a company. consequently, there is an increase in the savings of the company, that additionally enables the company to get the raw materials in bulk. This assists the organization in enjoying the discounts. The benefits are referred as the economies of scale.

The economies of scale are additionally divided into the internal economies and the external economies of scale. The internal economies of scale originate from the growth of plant size within an organization. The internal economies of scale originate from the rise of organization itself. On the other hand, the external economies of scale happen outside the organization. The external economies of scale of happens inside the industries that provides benefits to the company. Where a company expands, organizations might get benefit from the better network of transportation, infrastructure and other facilities. This is considered helpful in reducing the cost of a company.

Diseconomies of Scale: Diseconomies of Scale happens when the cost per unit of the production or the average cost increase due to the increase in the output or sales. Growth introduces both the advantages and disadvantages for the business. There are mainly two forms of diseconomies of scale. This involves internal diseconomies and external diseconomies. The internal diseconomies of scale of happens when the cost of production of the company rises. The most important factor that creates an influence on the cost of production within the organization comprises of the lack of decision, supervision and technical difficulties.

On the other hand, the external diseconomies of scale restrict the expansion of a company or the industry. The important factor that acts as the limitation to the expansion comprises of the rise in the cost of production, scarcity of raw materials and lower supply of the skilled labours.    

How do they occur?

Economies of Scale: The most important reason for the occurrence of economies of scale is that some of the production costs are considered fixed and with the rise in production these costs remain constant. Consequently, the cost per unit or the average cost is computed by dividing the cost based on the number of units of output. The economies of scale occurs involves the Fixed cost economies of scale and purchasing economies of scale.

Fixed Cost Economies of Scale:

a.Managerial: Managers are paid fixed salary.
b.Marketing: Advertisement, endorsement promotional activities does not directly relies on the quarterly production.
Purchasing Economies of Scale:

This happens when the large companies are successful in negotiating highly favourable terms when purchasing the raw materials such as bulk purchasing and financial terms.

Diseconomies of Scale:

Improper Communication: If the goals of production and objectives within the organization is not communicated property among the employees then it might result in over or under production which results in diseconomies of scale.

Inadequate Motivation: Because of poor network of communication it becomes tough for employers to interact with employees and form a sense of belongingness. This lead to decline in production output and increases the cost significantly.

Loss of Control: It is a main problem within the organization and becomes difficult for managers in supervising the sub-ordinates inside larger companies

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