Internal Economies Diseconomies Scale

When a firm expands in size by increasing the scale of its output, certain cost advantage accrue to the firm those are called internal economies. Internal economies to the firm may be of various types: technical, commercial, and financial and risk spreading. As the firm expands in its size, it may profitably employ a big machine, capacity underutilization may be held in check, an economic volume of by-product may be turned out – these are technical economics. Similarly, an expanding firm may arrange the bulk purchase of its materials and the bulk sale of its product; it may save some transport costs, distribution costs and procurement costs- these are commercial economies. A growing firm can also furnish good security and can, therefore, float funds easily from internal as well as external sources at economic terms- these are financial economies

However, if the firm continues to increase in size indefinitely soon several bottlenecks emerge and the result are internal diseconomies of scale. The point, at which the long run average costs are at a minimum, is the optimum size of the firm. This optimum size is the outcome of the interplay of various optimal, technical, financial, managerial, etc.

The concept of internal diseconomies is an operationally significant concept. It explains how small firm exists alongside large firm in the same industry. There are actually three major differences between large and small firms: differences in techniques of management, in techniques of production and in the degree of capitalisation.

Sometimes complexities may reach such heights that managerial inefficiency may result. In order to avoid such managerial diseconomies, management may decide to impose a limit on the expansion of the firm. A small firm often gets many matters handled by line-management rather that specialist. Second, the different techniques of production uses by the large and small firm are normally based of cost consideration linked to the degree of a capitalisation. A large firm can afford to employ a highly capital intensive technique which can produce fine product on large scale without involving a lot of time.

Sometimes, as the small firms, which successfully avoid internal diseconomies of scale can also cooperative for purpose of bulk purchase and bulk sale? All these go to explain the survival of small firms alongside large firms within a competitive industry.

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