MANAGERIAL ECONOMICS

THEORY AND APPLICATIONS

CHAPTER-11
ECONOMICS OF SCALE AND SCOPE

Chapter 11 Economies of Scale and Scope

Learning Objectives
After completing this chapter, the student should be able to: Understand the meaning and significance of economies of scale. Distinguish between internal and external economies. Trace the impact of learning curve. Understand the meaning and significance of economies of scope. Measure the scale economies index. Know the meaning of X-efficiency.
Managerial Economics Theory and Applications Dr. D. M. Mithani

Himalaya Publishing House

Chapter 11 Economies of Scale and Scope

Economies of Scale It implies de-creasing long-run average costs (LAC). Internal Economies Economies realised within the firm when its life expands. External Economies Economies occurring from outside to the firm when the industry grows.

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Forms of Internal Economies

Labour Economies

Technical Economies
Economies of superior technique. Economies of increased dimension.

Economies of linked process.

Economies in power. Economies of by-products.

Economies of continuation.

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Managerial Economies Marketing Economies

Financial Economies
Risk-Minimising Economies

By diversification of output.
By diversification of market. By diversification of sources of supply as well as of process of manufacturing.
Himalaya Publishing House Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Forms of External Economies

Economies of Localisation
Economies of Information or Technical and Market Intelligence

Economies of Vertical Disintegration

Economies of By-products

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Economies of Scale of a Bank

Diseconomies of Scale It implies increasing long-run average costs when firm expands its size beyond a limit.
Himalaya Publishing House Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Difficulties of Management Difficulties of Co-ordination Difficulties in Decision-making

Increased Risks
Labour Diseconomies Scarcity of Factor Supplies Financial Difficulties Marketing Diseconomies Economies of Scope Reduction in costs due to joint production of complementary goods.
Managerial Economics Theory and Applications Dr. D. M. Mithani

Himalaya Publishing House

Chapter 11 Economies of Scale and Scope

Degree of Economies of Scope

The degree of economies of scope can be measured in terms of the difference in the costs of production jointly and separately. The following formula is used to measure the degree of economies of scope.

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

The Learning Curve

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Learning Effect on LAC

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Scale Economies Index

Scale Economies Index (SEI) is a measurement to trace the relationship between cost and economics of scale.

SEI = (1 COE) 100

Where, SEI = Scale Economics Index EC = Cost-Output Elasticity Cost-Output Elasticity (COE) is derived as the ratio of percentage change in output. Thus,
COE = C Q
Himalaya Publishing House Managerial Economics Theory and Applications Dr. D. M. Mithani

Chapter 11 Economies of Scale and Scope

Scale Economies Index Measurement of the empirical relation between cost and economies of scale. X-Efficiency It relates to the minimisation of wastage in the production process

Himalaya Publishing House

Managerial Economics Theory and Applications Dr. D. M. Mithani