When a firm increase its scale of production, the reduced costs or economies which this firm gets as a result are called internal economies. The word 'internal' is used here to denote the limitation of these econimies to the firm itself. According to Cairncroses, "Internal economies are those which are open to a single factory or a single firm independently of the action of other firms. They result from an increase in the scale of output of a firm adn cannot be achieved unless output increases." Internal economies mean increasing returns to scale. These are the result of increased division of labour or the use of labour or the use of improved production methods. The benefit of these economies is received by a firm according to its organizationl efficiency. The main factors responsible for internal economies ae us under :
1. Technical Economies
Technical factors also affect the returns to scale. Bigger firms are having more of resources at their disposal. They are able to install the most suitable machinery. Some machines are having a technically minimum size. The smaller sized firm may not be able to use such machines to full capacity. As a result, larger firms have lower costs of production because of the full capacity use. Technical economies may arise out of any one of the these resons.
(a) Economies of increase of dimension
When a firm increase its scale of production, its average cost of production falls simply because of the larger volume of production. For example, if a firm doubles the length and breadth of a godown, the godown capacity is more than doubled. This is simple arithmetical example.
(b) Economies of linking of processes
As a firm increases its scale of production, it is enabled to link its production processes much better. A large firm is enabled to link its production processes much better. A large firm is enabled to use all the production processes from the use of a few material to the marketing or its finished products, Linking of the production processes saves time, material and labour costs.
(c) Economies of the use of by-products
A large-sized firm is in a position to use its by-products and waste material to produce another product. This lowers the cost of production ot the of production of the main product. For example, a big sugar factory can have a small plant to produce power alcohol from the residual liquid left after suger extraction. This lowers the cost of suger production.
2. Managerial Economies
With the increase in the scale of production a firm can benefit by specializing its managerial departments. Each department is under the charge of an expert. A small firm cannot afford this specialisation. Experts are able to reduce the costs of production under their supervision.
3. Labour Economies
Increase in the scale of a firm also enables it to take the advatange of labour economies. A larger firm employs a large number of workers. Each worker is given the kind of job he is fit for. The personnel officer evaluates the working efficiency of the labour if possible. Workers get skilled in their operations which saves production time on the one hand and encourages new ideas on the other. All this leads to falling cost with increased scale.
4. Marketing Economies
As the scale of a firm is increased, it obtions economies of purchase and sale. Since the firm purchases on large scale, it gets all the inputs at a cheaper rate compared to the small firms. Similarly, wholesalers charge less for the sale of the products of a large-sized firm.
5. Finacial Economies
A larger firm is able to reduce its costs of borrowing from the market. A bigger firm is better known to the financial institutions and the stock market. The charges of selling bonds and shares or of borrowing direct from the market are much less than those demaned from smaller firms.
6. Risk-bearing Economies
The ability of a larger firm to bear risks of business is much better. Every firm has to face some particular and some general risks in order to continue production. The common risks are those which all firms have to face equally irrespective of their size. For example, during depression market prices fall for every firm. There is some particular risk to be borne by a particular firm when the price of a particular product falls in the market. Whether risks are general or of the particular type, a small firm has less ability to face them bacause of less financial resources and a smalller area of the market for sale. But bigger firms are able to face risks due to the stonger financial position. These risk-bearing economies crisis while the smaller firm fails. The exampes of internal economies given above are also particular to a firm. Hence thay are called 'Internal'. These partly help us to explain the increasing returns to scale and partly serve to account for the fall in average cost as the size of the firm increases. Internal economies are connected with a particular firm. Therefore, they are relevant to particular-equilibrium analysis.
Also, Read
