(a)Define economies of scale.
(b) Explain the following:
(i) managerial economies;
(ii) technical economies.
(c) Describe any four disadvantages of large scale production.
Explanation
(a) Economies of scale refer to the cost-saving advantages which a firm enjoys as it grows
larger in size.
(b)(i) Managerial economies: Large firms make possible division of labour in management which increases experience and efficiency of labour. i.e. Large firms are able to employ and retain specialists which leads to increased output.
(ii) Technical economies: In large firms, the intensive use of machinery leads to a reduction in average cost of production. Also, a large firm may not have to increase the size of its machinery as the existing one may have a higher installed capacity.
(c) (i) Slow response to changes: As a result of its organizational and technical set-up, large scale firms take time to react and implement changes.
(ii) Since ownership is usually separated from control, workers do not always put in their best.
(iii) A large number of employees usually leads to lack of interpersonal relationship between the management, employees and customers.
(iv) The bureaucratic set-up of large scale firms usually leads to delay in decision- making.
(v) Large scale production may lead to the creation of monopoly. A large firm may use various methods to ward off competitors.
(vi) A large scale firm may fail to adequately forecast demand for its products, thereby engaging in overproduction, leading to a waste of resources.
(vii) A large firm can make great losses when mistakes are made which can be very costly.
(viii) As a firm expands, control and proper supervision of workers becomes more difficult.