Question

International Business:

Question 3.

Describe the economic value of created from growth (economies of scale) and how to determine when diseconomies of scale exist. What is the management imperative to mitigate diseconomies of scale?

Answer 1

Economies of Scale:

It means when goods or services can be produced on a larger scale with less input cost.

Economies of scale may be divided into:

(a) Internal or Real Economies

(b) External or Pecuniary Economies

(a) Internal Economies: It includes

i) Economies in Production :- It occurs because of labour specialisation

(ii) Economies in Marketing:- It occurs because for well established thee is less need of advertisement.

(iii) Managerial Economics:- It occurs because of centeralistion

(iv) Economies in Transport and Storage:- It occurs because large size firm may own the transport so there would be less cost.

(b) External or Pecuniary Economies

It occurs because of external factor like cheaper raw materials, less interest rate etc.

Diseconomies of Scale:

(a) Internal Diseconomies: It arises because of manager and labor inefficencies

(b) External Diseconomies: It occurs because of external factor like expensive raw materials, higher interest rate etc.

Overcoming Diseconomies of scale

It can be done by dividing more manager section and providing them incentives or by upgrading technology and which again lead to increase in efficiency