Question

How do you explain economics of large-scale production? Who do certain businesses, such as cigarette manufacture, seem to enjoy them, whereas other businesses, such as barbering do not?

Answer 1

The production scale refers to the quantity of factors used, the quantity of products produced, and the production techniques adopted by a producer. The size of production grows as production increases with the rise in the amounts of land, labor and capital. A business may carry out production on a small scale or on a large scale. The size of production is said to be small when a company operates by using less resources and small quantities of other output factors. On the other hand, a corporation is said to be working on a large scale using more capital and smaller amounts of other variables.

An industry's production rate increases with the increase in the number of companies in the industry, or / and the increase in the size of the companies in it. A company increases its scale of production to earn higher profits and thus absorbs several large-scale production economies which, in effect, enable it to lower production costs and increase its productive output. When most companies enjoy large-scale manufacturing markets, they are also open to an industry that involves these firms.

Marshall has divided large-scale production economies into internal and external economies. External economies are external to a business when it reduces its production costs and raises efficiency. They "are open to a single factory or company regardless of other firms ' actions. They result from an increase in the company's output scale and can not be achieved without an increase in output. These are not the products of any kind of inventions, but are due to the use of proven production methods that are not worthwhile for a small company.

Many fixed output variables are indivisible in the sense that in a set minimum scale they must be used. Those "input factors can be used most effectively at a fairly large output, but operate less efficiently at small outputs because they can not be divided into smaller units." Hence, as output rises, the indivisible factors used below capacity can be used to reduce costs to their full capacity. In the case of labor, equipment, marketing, finance and science, these indivisibilities occur.There are indivisibilities of analysis as well. A large company has the ability to establish a research laboratory and to benefit from the development of new production methods that help to expand production and reduce costs.

Often big companies can afford to pay for and build expensive machines. These machines are more competitive than machines that are small. It is possible to spread the high cost of such machines over a larger output that they help produce. Thus the production cost per unit falls into a large company that employs expensive and superior plant and equipment and thus enjoys a technical superiority over a small company.

A large company can reduce its production cost per unit by connecting the different production processes. A large sugar manufacturing company, for example, can own its sugar cane plantations, manufacture sugar, store it in bags, transport and distribute sugar through its own transport and distribution departments. Therefore, a large company saves the costs incurred on intermediaries by connecting the different development and selling processes, thus increasing the unit cost of production.