(a) Define economies of scale. (b) Explain the following: (i) managerial economies; (ii) technical economies. (c) Describe any four disadvantages of large s...

Answer Details

(a) Economies of scale are the advantages (falling average cost of production) that a firm enjoys as it expands its scale of output. As output grows, the cost of producing each unit falls.

(b) Types:

• Managerial economies: a large firm can employ specialist managers, each concentrating on one function (production, sales, finance), which raises efficiency and spreads the cost of skilled management over a large output.
• Technical economies: a large firm can install and fully use large, specialised, cost-saving machinery and take advantage of the division of labour, so cost per unit falls.

(c) Four disadvantages of large-scale production:

• Difficulty of management and control: the firm may become too big to coordinate efficiently (diseconomies of scale).
• Poor labour relations: the distance between management and a large workforce weakens personal contact and morale.
• Risk of overproduction: mass output may exceed demand, leading to gluts and losses.
• Tendency towards monopoly: large firms may dominate and exploit consumers, and heavy capital is tied up and hard to withdraw quickly.