Wed 11/20 Chp.6&7 Test After: Chp.8 Title Page –DUE tomorrow.
6 chp,16,17
Transcript of 6 chp,16,17
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Lecture 6
Scale of Production
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Scale of Production
The scale of production has an important bearingon the cost of production
It is the manufacturers common experience thatlarger the scale of production
The lower generally is the cost of production
That is why entrepreneur is tempted to enlarge
the scale of production so that he may benefitfrom resulting economies of scale
These economies are of two types
External economies
Internal economies
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Economies of Large Scale Production Efficient Use of Capital Equipment
There is large scope for the use of machinery which results in lower costs
Economy of Specialized Labour Specialized labour produces a larger output and of better quality
Better Utilisation and Greater Specialization in Management a capable manager is under-utilized in a small concern
Economies of Buying and Selling Good rates while buying raw materials and high net profits on large sales
Economies of Overhead Charges The expenses of administration and distribution per unit are much less in big units
Economy in Rent A large-scale producer makes a saving in rent too
Experiments and Research Big concerns can spend a lot on research activities which pay back in long run
Advertisement and Salesmanship Can spend on advertisement
Utilization of By-products By products can be utilized in big concerns
Meeting Adversity A big business can show resistance in time of adversity
Cheap Credit Bank give cheap credit to big concerns
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Diseconomies of Scale Overworked Management
A large scale producer cannot pay attention to every detail
Individual tastes Ignored
Large scale of production is of uniform quality so individual tastes areignored
No Personal Element
Managed by employees so no personal interest
Possibility of depression Large scale production may result in over production
Dependence on foreign markets
Large scale of production is normally dependent on foreign markets
Cut-throat competition
large scale producers fight for markets International complications and war
Large scale production at international level may give rise tointernational conflicts and may lead to war
Lack of adaptability
It is difficult for large scale units to shift from one business to another
while easy for small business
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Types of Economies
Internal Economies
External Economies
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Internal Economies
Internal Economies are those economies inproduction or reduction in production costs Which accrue to the firm itself when it expands its
output or enlarges its scale of production
The internal economies arise with a firm as aresult of its own expansion independent of thesize and expansion of the industry
Internal economies may be of the following types
Technical economies
Managerial economies
Commercial economies
Financial economies
Risk-bearing economies
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Technical Economies
There are four ways in which technicaleconomies can arise
Large size
Economies arise when large machines are used
E.g. big boiler, big furnace
Linking process
A dairy may have its own fodder farm or a sugar factory
has its own sugarcane farm
Superior technique
Superior technologies
Increased specialization
Specialization and division of labour are advantageous
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Managerial Economies
These economies arise from the creation of
special departments or from functional
specialization
They are also resulted from delegation of
routine and detailed matters to subordinates
This is vertical division of labor. However there
can be horizantal division of labour
By placing each division under an expert
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Commercial Economies
They arise from the purchase of materials andsale of goods
Large businesses have bargaining advantages and
are accorded a preferential treatment by the firmsthey deal with
They are able to secure freight concessions fromrailway and road tranport
Cheap credit from banks Prompt delivery
Careful attention
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Financial Economies
These economies arise form the fact that a big
firm has better credit and can borrow on more
favourable terms.
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Risk-bearing Economies
A big firm can spread risks and can often
eliminate them
This is done by diversifying output Diversification imparts it strength and stability
and takes it less vulnerable to changes in
commercial fortunes
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External Economies
External economies are those economies whichaccrue to each member firm as a result of theexpansion of the industry as a whole
Expansion of an industry may lead to theavailability of new and cheaper raw materials,tools and machinery and discovery and diffusionof a superior technical knowledge
There are various types of external economies Economies of concentration
Economies of information
Economies of disintegration
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Economies of Concentration
These economies relate to advantages arising
from the availability of
Skilled workers
The provision of better transport and credit
facilities
Stimulation of improvements
Benefits from subsidries
Scattered firms do not enjoy such economies
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Economies of Information
These economies refer to the benefits which
all firms engaged in an industry derive
From the publication of trade and technical
journals and
from central research institute
Each individual need not incur expenditure on
research. It can draw such benefits from
common pool
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Economies ofDisintegration
When an industry grows, it becomes possible
to split some of the processes which are taken
over by specialist firms
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Relationship between IE and EE
No hard and fast line can be drawn between the two
Internal economies are the result of expansion ofindividual firms while external economies are the
result of expansion or development of whole industry There can also be diseconomies if some inefficient
factors are brought in while expansion in a firm or in anindustry
If scale of production is increased it brings ineconomies of scale. However, if it is increased beyondlimits the economies of scale would be converted indiseconomies of scale
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Production Possibility Curve
&
Production Function
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Production Possibility Curve
The production possibility curve shows themaximum out put of any one commodity thatthe economy can produce together with the
prescribed quantities of other commoditiesproduced and resources utilized
In short, the production possibility curve tellsus what assortment of goods and services theeconomy can produce with the resources andtechniques at its disposal
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Example
Production Possibilities Goo1d X
(thousands)
Good Y
(thousands)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
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Production Possibility Curve
A curve depicting all maximum output possibilities for two or moregoods given a set of inputs (resources, labor, etc.). The PPF assumesthat all inputs are used efficiently
At point X resources are not being efficiently utilized
Point Y is not reachable under given resources
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Marginal Rate of Transformation
In order to produce more X we must sacrificesome Y
The rate at which one product is transformed into
another is called marginal rate of transformation
For instance marginal rate of transformation
between good X and good Y is the amount of Y
which has to be sacrificed for the production of X
The MRT increases as Y is produced more andmore . That is why the production possibility
curve is concave
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Iso-Revenue Line
The iso-revenue line is the bundles of outputsthat return the same level of revenue.
It represents the rate at which the market is
willing to exchange one product for another.
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Production Function Production Function may be defined as the functional relationship between
physical inputs (i.e. factors of production) and physical outputs (i.e. the
quantity of goods produced) It shows the maximum amount of output which can be produced from a
given set of inputs in the existing state of technology
Production function depends on
Quantities of resources used
State of technical knowledge
Possible processes
Size of the firms
Nature of firms organization
Relative prices of the factors of production and the manner in which thesefactors are combined
With the change of these factors production function will also change Production Function can be expressed as
X=f(a, b, c, d, ..) X is the output of a commodity per unit of time
a,b,c,d are the various productive resources
f is the fucntion
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Important Points in PF
Purely technical relationship
Input with output
No reference to money price
The output is the result of a joint use of thefactors of production
The combination of inputs depends on
technology Variability of the factors of production is
considered while defining production function
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Types of Production Function
Fixed Proportion Production Function Factors of production are used in definite fixed
proportions
For example a fixed number of workers are
required to produce a given unit of output. This
proportion cannot be varied by substituting one
factor for another
Variable Proportion Production Function The technical coefficient of production is variable
Substitution of factors possible
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Quiz What an indifference curve shows and why it
is convex to the origin?
Show Income Effect, Price Effect and
Substitution Effect through indifference curveanalysis and explain it?
What is elasticity of demand? Please Explaindifferent cases and types of elasticity of demand.