Economics of Scale - E-book - ePub

The beginning of this economic concept, economies of the scale, can be dated back to Adam Smith who was a Scottish pioneerof political economy and an important key figure during theScottish Enlightenment Era who first mentioned this concept inhis book "Wealth of Nations" in 1776 and was based on theidea of obtaining greater production return profits through theuse of division of labour. The economies of the scale rely over the fixed cost that areuniform and do not vary with any of the alterations in outputprocesses or variable costs which may undergo changes due tochange in the amount of output.
Other sources of theeconomies of scale are Production, Managerial, Technological, Financial, and Marketing. The economies of scale tend to have a significant effect on theproduction costs of the material. The economies of scale reducethe per unit fixed cost of the product and with increasedproduction the fixed cost of the product expands over theentire output at a greater rate than before. The economies ofscale are also responsible for bringing down the per unit costvalue of the product.
This occurs due to the expansion ofproduction scale which as a result improves the efficiency ofthe production processes. The economies of scale are cost-advantageous and the workingof business takes place through exploitation of expanding scaleof production. There are broadly two main types of economiesof scale- Internal and External economies of scale which arefurther subdivided into various types.
In simple terms, diseconomies of scale can be understood asthe opposite condition of economies of scale. It is a conditionwhich arises when economies of scale fail to function within thefirm and when there is an increase in the value of costs perunit. The basic fundamental concept of economies of scale was-lesser the quantity of produce, the greater the per unit fixedcost of the product. The diseconomy of scale generates in thecondition of the exact opposite case.
One of the primaryreasons for the diseconomy to occur is the inability of the firmto manage a larger number of workforce.