External Economies and Diseconomies:
Internal economies are economies enjoyed by a firm on account of use of greater degree of division of labour and specialised machinery at higher levels of output. They are internal in the sense that they accrue to the firm due to its own euorts. Besides internal economies, there are external economies which are very important for a firm. External economies and diseconomies are those economies and diseconomies which accrue to firms as a result of expansion in the output of the whole industry and they are not dependent on the output level of individual firms. They are external in the sense that they accrue to firms not out of their internal situation but from outside i.e. due to expansion of the industry. These are available to one or more of the firms in the form of:
1. Cheaper raw materials and capital equipment: The expansion of an industry may result in exploration of newandcheapersources of rawmaterial, machineryandother typesof capitalequipments. Expansion of an industry results in greater demand for various kinds of materials and capital equipments required by it. The firm can procure these on a large scale at competitive prices from other industries. This reduces their cost of production and consequently the prices of their output.1.
2.Technological external economies: When the whole industry expands, it may result in the discovery of new technical knowledge and in accordance with that, the use of improved and better machinery and processes than before. This will change the technical co-eflcient of production and enhance productivity of firms in the industry and reduce their cost of production.
3. Development of skilled labour: When an industry expands in an area, the labourers in that area are well accustomed with the diuerent productive processes and tend to learn a good deal from experience. As a result, with the growth of an industry in an area, a pool of trained labour is developed which has a favourable euect on the level of productivity and cost of the firms in that industry.
4. Growth of ancillary industries: Expansion of industry encourages the growth of a number of ancillary industries which specialise in the production and supply of raw materials, tools, machinery, components, repair services etc. Input prices go down in a competitive market and the benefits of it accrue to all firms in the form of reduction in cost of production. Likewise, new units may come up for processing or recycling of the waste products of the industry. This will tend to reduce the cost of production in general.
5. Better transportation and marketing facilities: The expansion of an industry resulting from entry of new firms may make possible the development of an eflcient transportation and marketing network. These will greatly reduce the cost of production of the firms by avoiding the need for establishing and running these services by themselves. Similarly, communication systems may get modernised resulting in better and speedy information dissemination.
6. Economies of Information: Necessary information regarding technology, labour, prices and products may be easily and cheaply made available to the firms on account of publication of information booklets and bulletins by industry associations or by governments in public interest.
However, external economies may cease if there are certain disadvantages which may neutralise the advantages of expansion of an industry. We call them external diseconomies. External diseconomies are disadvantages that originate outside the firm, especially in the input markets. An example of external diseconomies is rise in various factor prices. When an industry expands the requirement of various factors of production, such as raw materials, capital goods, skilled labour etc increases. Increasing demand for inputs puts pressure on the input markets. This may result in an increase in the prices of factors of production, especially when they are short in supply. Moreover, too many firms in an industry at one place may also result in higher transportation cost, marketing cost and high pollution control cost. The government may also, through its location policy, prohibit or restrict the expansion of an industry at a particular place.
1. Cheaper raw materials and capital equipment: The expansion of an industry may result in exploration of newandcheapersources of rawmaterial, machineryandother typesof capitalequipments. Expansion of an industry results in greater demand for various kinds of materials and capital equipments required by it. The firm can procure these on a large scale at competitive prices from other industries. This reduces their cost of production and consequently the prices of their output.1.
2.Technological external economies: When the whole industry expands, it may result in the discovery of new technical knowledge and in accordance with that, the use of improved and better machinery and processes than before. This will change the technical co-eflcient of production and enhance productivity of firms in the industry and reduce their cost of production.
3. Development of skilled labour: When an industry expands in an area, the labourers in that area are well accustomed with the diuerent productive processes and tend to learn a good deal from experience. As a result, with the growth of an industry in an area, a pool of trained labour is developed which has a favourable euect on the level of productivity and cost of the firms in that industry.
4. Growth of ancillary industries: Expansion of industry encourages the growth of a number of ancillary industries which specialise in the production and supply of raw materials, tools, machinery, components, repair services etc. Input prices go down in a competitive market and the benefits of it accrue to all firms in the form of reduction in cost of production. Likewise, new units may come up for processing or recycling of the waste products of the industry. This will tend to reduce the cost of production in general.
5. Better transportation and marketing facilities: The expansion of an industry resulting from entry of new firms may make possible the development of an eflcient transportation and marketing network. These will greatly reduce the cost of production of the firms by avoiding the need for establishing and running these services by themselves. Similarly, communication systems may get modernised resulting in better and speedy information dissemination.
6. Economies of Information: Necessary information regarding technology, labour, prices and products may be easily and cheaply made available to the firms on account of publication of information booklets and bulletins by industry associations or by governments in public interest.
However, external economies may cease if there are certain disadvantages which may neutralise the advantages of expansion of an industry. We call them external diseconomies. External diseconomies are disadvantages that originate outside the firm, especially in the input markets. An example of external diseconomies is rise in various factor prices. When an industry expands the requirement of various factors of production, such as raw materials, capital goods, skilled labour etc increases. Increasing demand for inputs puts pressure on the input markets. This may result in an increase in the prices of factors of production, especially when they are short in supply. Moreover, too many firms in an industry at one place may also result in higher transportation cost, marketing cost and high pollution control cost. The government may also, through its location policy, prohibit or restrict the expansion of an industry at a particular place.
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