Meaning of Economies of Scale: -
The term or word economies means advantages and the term or word scale means size. As a firm grows from small to large, it enjoys many advantages; these advantages are known as economies of scale. Economies of scale are those advantages, which help firms to reduce its average cost and increase its profit. Economies of scale may take the following form:
Meaning of Internal Economies of Scale: -
Internal economies of scale are those advantages which firms enjoy with in the firm itself, independently of what is happening to others. Due to internal economies of scale average cost decreases, price becomes cheaper; quantity demanded increases leading to more sales the firm expands in size.
Meaning of External Economies of Scale: -
External economies of scales are those advantages, which firms enjoy when many firms are located at a particular place. External economies of scale is enjoyed by all firms, either small or large. Due to external economies of scale the industry grows in size. It is external for all firms.
Various Types of Internal Economies of Scale: -
Internal economies of scale may take the following form:
1. Technical: It refers to the technical aspects of the production process and it favours large-scale production. The technical aspects may take the following forms:
(a) Specialization of men and machine: As a firm grows in size it introduces division of labour so that workers become skilled in their performance. Specialized machines are being installed and are operated by specialized workers. For this reason volume of output increases, average cost decreases and prices becomes cheaper. Specialization of men and machines leads to efficiency and developments.
(b) Indivisibility of factors of production:
(i) Capital: Some of the factors of production have a minimum size, which cannot be splitted up or divided into smaller parts. For example...