Economies of Scale

The term economies of scale denote ‘saving’ in cost of production with an increase in scale of output, or the size of the plant. It should be noted that the existence of economies does not mean a reduction in total cost in absolute terms and manifests itself in a reduction in average cost of output.

Economies of scale: Internal

Internal economies are associated with the expansion of the scale of output of the firm itself. They are not derived indirectly as a result of expansion of the industry to which it belongs.

 Listed below are some of the leading sources of such economies.

  • Managerial Economies
  • Financial Economies
  • Technical Economies
  • Better Utilisation of Inputs
  • Economies of Inventories
  • Marketing Economies
  • Advertising
  • Risk Economies

Economies of Scale: External

These economies are those which are reaped by the firm not on account of its own efforts and increase in its scale, but account of expansion and growth on of the industry to which it belongs as also on account of overall development of the economy and markets. Some of the sources of these economies are as under:

  • Economies of Information
  • Research and Development
  • Economies of Concentration
  • Economies of Specialisation