Economics Essay 77: Economies of Scale

 Explain how a firm may benefit from both internal and external economies of scale.

A firm can benefit from both internal and external economies of scale, leading to cost advantages and enhanced competitiveness. Internal economies of scale arise from factors within the firm's control, such as technological advancements, managerial expertise, and financial capabilities. On the other hand, external economies of scale result from industry-specific or location-specific advantages shared by multiple firms within the industry.

Internal economies of scale can be observed in various ways. For instance, a large manufacturing company that increases its production scale can invest in specialized machinery, technology, and production processes. This enables the firm to achieve higher output levels and lower costs per unit by reducing labor requirements and increasing production efficiency.

Managerial economies can also contribute to cost advantages. As a firm grows, it can afford to hire specialized managers and staff who possess expertise in specific areas. This leads to better coordination, improved decision-making, and efficient utilization of resources, all of which can lower costs. For example, a larger firm may have dedicated human resources, finance, and marketing departments, which can optimize operations and increase efficiency.

Financial economies are another benefit of internal economies of scale. Large firms typically have better access to financial resources, such as loans, equity financing, and favorable credit terms. This allows them to raise capital at lower costs and invest in projects with higher returns. Moreover, larger firms may enjoy economies of scale in purchasing, securing bulk discounts on raw materials, components, and supplies.

External economies of scale, on the other hand, result from factors outside the firm's direct control but within the industry or geographic region in which the firm operates. These economies are shared by all firms within the industry and can provide additional cost advantages.

For example, firms located in industrial clusters or specialized zones can benefit from shared infrastructure, such as transportation networks, utilities, research facilities, or specialized suppliers. This reduces costs and enhances efficiency. A cluster of software development firms located in a technology hub can benefit from a larger pool of skilled programmers and engineers. This enables them to hire experienced talent, reduce training costs, and foster knowledge sharing among professionals, leading to faster product development cycles and cost efficiency.

In addition, external economies of scale can arise from knowledge spillovers and collaboration. Firms located in close proximity to research universities and industry networks can benefit from sharing information, best practices, and research findings. This facilitates innovation, efficiency gains, and cost reductions. For instance, in the biotechnology industry, firms located near research universities and medical centers can collaborate with researchers, share discoveries, and access specialized equipment or facilities.

By benefiting from internal and external economies of scale, firms can achieve lower average costs, increased efficiency, and improved competitiveness. This allows them to offer products at competitive prices, invest in research and development, expand their market share, and potentially earn higher profits. These advantages can also create barriers to entry for new firms, strengthening the position of established firms within the industry.

A level Economics Essay 13: Economies of Scale

Using examples, explain how internal and external economies of scale are both able to reduce a firm’s unit costs.

Let's explain how internal and external economies of scale can reduce a firm's unit costs using examples:

Internal Economies of Scale: Internal economies of scale refer to cost reductions that occur within a firm as it grows and expands its operations. Here are some examples:

1. Technical Economies: As a firm grows, it can benefit from technical economies by investing in advanced machinery, technology, or automation. This can increase productivity and lower unit costs. For instance, an automobile manufacturer that expands its production capacity can leverage economies of scale to invest in more efficient assembly lines and robotic systems, leading to lower costs per unit produced.

2. Managerial Economies: Larger firms often have access to specialized managerial expertise, leading to better coordination and efficiency in operations. For example, a multinational corporation with subsidiaries in multiple countries can centralize certain functions like procurement, marketing, or human resources, taking advantage of economies of scale in management expertise and reducing overall costs.

External Economies of Scale: External economies of scale refer to cost reductions that occur outside of a firm, typically within an industry or geographical region. Here are some examples:

1. Infrastructure Economies: When multiple firms in an industry operate in close proximity, they can benefit from shared infrastructure and services. For instance, industrial parks or clusters allow firms to share transportation networks, utilities, and specialized support services. This reduces individual firm costs and promotes efficiency. The Silicon Valley in California is an example where technology firms benefit from a shared ecosystem of infrastructure, research institutions, and a skilled labor pool.

2. Supplier Economies: Concentration of suppliers in a specific area can lead to lower input costs for firms. When suppliers are close by, transportation costs and lead times are reduced. Additionally, the presence of specialized suppliers can lead to greater access to customized inputs and lower prices. For example, the fashion industry in cities like Milan, Italy benefits from the concentration of fabric suppliers, resulting in lower sourcing costs for clothing manufacturers.

By achieving both internal and external economies of scale, firms can reduce their unit costs. Internal economies focus on optimizing operations and leveraging efficiencies within the firm, such as through improved technology or managerial expertise. External economies, on the other hand, arise from the industry or regional context, benefiting firms through shared infrastructure, specialized suppliers, or a skilled labor pool.

It is important to note that while economies of scale can lower unit costs, there may be limits to their extent. Eventually, firms may encounter diseconomies of scale, where further expansion leads to diminishing cost savings or increased complexities. It is crucial for firms to carefully assess and balance the benefits and drawbacks of scale to optimize their cost structures and maintain competitiveness.

How to overcome your fear of failure

5 Things to do when you have too many ideas and never finish anything

A Sick Society That Manufactures Failures – the True Face of Education in India

Avjit Pathak in The Wire.IN


To gain awareness of the presence of things other than “me and what is mine”, in other words to develop sympathy for the outside world is a way to liberate oneself from egocentricity. To have such a character is the sign of good education. – Devi Prasad, Art: The Basis of Education

Board exams… Entrance tests for medical/engineering colleges… College admissions: where are the youngsters moving? What does growing up mean with the euphoria of success and the stigma of failure? What is the experience of walking through a path defined by others – regimented schools and market-driven forces?

Let me begin with the story of a young boy I have been interacting with for quite some time. Yes, he is in the ‘science’ stream; what is popularly known as PCM (Physics, Chemistry and Mathematics) is his religion and possibly a road to what the aspirational middle class society regards as ‘success’ – or the moment of being ‘settled’.

With a series of private tutors, coaching centres and exam after exam for getting entry into any of the engineering/medical colleges, there is no breathing space in the life of this 17-year old boy. He is anxious; his parents are worried. Sometimes I feel like talking to him about poetry and cinema, literature and travelogue; he thinks it is useless and his parents too are not very interested in these ‘softer’ dimensions of life. Every moment, they are compelled to think, has to be utilised for achieving ‘success’.

With my sociological sensibilities, I know that he is not alone – he symbolises a social fact, he is the product of an oppressive reality characterised by a faulty pattern of education, parental ambitions and the aggression of hyper-competitiveness resulting from the increasing gap between the number of aspirants and availability of opportunities in an over-populated and uneven society like ours.

Let us try to understand the resultant malady destroying the possibilities innate in the young mind.

‘Success’ has failed them

What is the nature of the mythical ‘success’ they are striving for?

First, in the age of trade and economic utility, it is based on the hierarchy of disciplines. Science/commerce is seen to be superior, practical and lucrative, but a negative orientation is attached to arts/humanities – these ‘soft’/’feminine’ disciplines, it is thought, have no ‘future’, and ‘intelligent’ students are not supposed to opt for these branches of knowledge.

Anyone familiar with school education in India knows how parents and teachers pressurise children to opt for science/commerce even if they are not inclined to it. In fact, many of them are never given the space to look at themselves, and understand their unique traits and aptitudes. This is the beginning of alienation in the child’s life. This alienation is further intensified when the societal pressure restricts their imagination, and forces them to believe that life is necessarily dark and bleak without medical science/engineering/management.

In this reckless preparation for ‘success’ their alienated selves find no joy, no ecstasy; coaching centres have no humour, guide books are devoid of creative imagination, ‘success mantras’ require war strategies, not the spirit of wonder, and the joy of learning is replaced by the neurotic urge to be a ‘topper’.

Second, this ‘success’ is centred on the hierarchy of professions. Money, technocratic sleekness and state power – these three factors play a key role in the making of this hierarchy. In fact, if one is courageous enough to decipher the folk tale of the ‘IIT-IIM syndrome’, one would realise that a mix of money and technological sleekness transforms their ‘products’ into corporate professionals with a good pay package.

In fact, ‘placement’ (your destiny is to find yourself as a well-fed/well-paid employee of the gigantic corporation) is the success index in a society that sanctifies technocratic capitalism; everything revolves around it. No wonder, in popular imagination a youngster – hardly 23-years-old – working as an IT professional in a multinational company and living in a gated community in Bengaluru is considered to be more ‘successful’ than, say, a 50-year old college teacher living in the suburb of Mumbai, and writing a scholarly book on medieval Indian history.

Furthermore, state power still has its aura. In our society, it reinforces the legacy of feudal aristocracy. No wonder, as the UPSC phenomenon suggests, the job of a district collector or a superintendent of police or an income tax officer (imagine their bungalows, office vehicles with red lights, and the brigade of police constables saluting them) continues to fascinate the young mind, particularly from the small towns.

No wonder, like the IIT/IIM entrance test, the UPSC civil service examination seems to have become one of the major national events – the most dominant evaluator for certifying one’s ‘success’ in life.

However, this ‘success’, as I wish to argue, has its own discontents. The reason is that, for most of them, it is an immensely alienating experience. It kills one’s creativity; it makes one one-dimensional; it robs one of the spirit of positive life-energy. Writing all sorts of mock tests conducted by the coaching centres endlessly, or transforming everything – be it the Olympics or the installation of a nuclear reactor or an international conference on climate change – into a typical ‘general studies’ stuff of the UPSC type is by no means a life-affirming experience.

See the march of the other-directed crowd at Kota in Rajasthan – a notorious site of inflated expectations and broken dreams. Or, for that matter, visit the tiny rooms in the narrow lanes of Mukherjee Nagar and Katwaria Sarai in Delhi, and meet the tired/exhausted youngsters from Bihar, Odisha and Uttar Pradesh trying to grapple with the Rao’s IAS notes. You realise that to achieve this sort of ‘success’, one fails as a creative being.

Students attend class at a coaching institute in Kota, Rajasthan. Credit: Reuters/Ahmad Masood

No wonder, corruption is rooted in this ‘success manufacturing machine’. The heavy cost of coaching centres, the exorbitant tuition fees in many of these medical/engineering/management colleges, and above all, the burden of donations and capitation fee: from where do you compensate the money you have spent? Is it the inflated dowry rate in a society that has not yet eradicated its patriarchal ethos? Or is it the normalisation of bribery and other malpractices in workplaces—from hospitals to construction sites, from block development offices to police stations?

Likewise, the very nature of this race is that your ‘success’ is assured at the cost of someone else’s failure. The fact is that most of the applicants would fail in this race. Imagine every year the number of ‘failures’ we create. They acquire a sense of stigmatised identity; this affects severely their life-trajectories filled with psychic wound and a sense of loss.

Finally, in this system, there is actually no winner; everyone is a loser. It redefines failure; everyone suffers from a sense of lagging behind. Hence, these days if you get 90% in the board exam, you are sad and depressed because your friends have got more than 95%. Likewise, if instead of pursuing economics at Shri Ram College of Commerce, you do Physics at Hindu College, you are a failure. Or for that matter, despite being in IIT, if you could not make it to the United states, you have failed in life.

In a way, ‘success’ has failed them.

Redefining the calling of life

It is not easy to come out of this trap. As the spectre of unemployment or the notion of a superficial notion of ‘social prestige’ haunts the young mind and their over-protective parents, it becomes exceedingly difficult to strive for meaningful education. Yet, I would insist that no social transformation is possible without the creative spark of human agency; and even in difficult times, we need to try our best to give the young a different vision of life.

It is in this context that I wish to make three points. First, as teachers/educationists/adults we all need to tell them that nothing matters more in life than inner fulfilment. There is no external marker of success – to be truly successful in life is to find joy and meaning in whatever one does, be it farming, nursing and teaching. One need not become like somebody else, one need not be ‘big’ and ‘gorgeous’. One has to be oneself – simple, authentic and confident of one’s own path.

Second, it is important to appreciate the plurality of skills/intelligence/sensitivity needed in diverse modes of occupational and vocational engagement. There is no reason why everyone has to think of joining the IIT; there is no reason why every science student should think of becoming an IT professional. A mature society is one that needs a spectrum of possibilities – engineers as well as filmmakers, doctors, historians, economists and art critics. The task of teachers is to make the child aware of his/her potential.

Third, fear has to be overcome. Youngsters ought to be encouraged to think differently, to take ‘risks’, and experiment with life. Nothing meaningful in life is possible if one is continually pressurised to remain ‘normal’, and opt for a ‘safe/tasted/secure/non-risky’ path. Living meaningfully is to understand the call of the puzzling curves and turning points in life. Karl Marx did not live as a ‘respectable’ employee in a company; Mahatma Gandhi did not end his life as a lawyer; G.M. Muktibodh, despite economic hardships, did not give up poetry; and Medha Patkar did not become a professor of social work in a university.

As adults, we would betray our children if we do not offer anything positive to them, if we metamorphose them into, as Franz Kafka indicated in one of his heart-breaking short stories, ‘insects’ roaming around the four walls of an office cubicle.

The Measure of Success

Ed Smith in Cricinfo

One of the rare pleasures of playing sport is deep concentration: back in that zone, the number of empty seats becomes an irrelevance © Getty Images

A chance conversation about motivation leads me to reflect on the nature of ambition. What is ambition, properly understood? Must it mean climbing the ladder to the top? Or is it the feeling that your life has a sense of purpose and meaning, even during those days that end in disappointment?

The initial question put to me was simple: "How do you stay motivated in county cricket, even if you never get back in contention for the Test team?" In trying to provide an answer, I ended up trying to work out what matters - in cricket, in writing, or in any career.

In one respect, I was exactly the right person to ask. Not because I always succeeded but because I often failed. Only now, six years after admitting defeat, do I think I am ready explicitly to analyse why. Between being dropped by England (aged 26) and retiring from cricket (at 31), I averaged about 45 in first-class cricket. It's not phoney modesty when I confess that isn't good enough. In your late 20s, as a mature batsman who knows his game, secure in your place and comfortable in your environment, you ought to average more like 55 or 60.

As Michael Vaughan often correctly points out, the biggest difference between Test and first-class cricket is not the balls that are bowled at you but the environment in which the match is played. International cricket has a sense of event - crowd, media, cameras and constant scrutiny - that county cricket often lacks. The mood of a Test match is an intoxicating experience. When all that is suddenly withdrawn, the short-term danger is feeling that other cricket - the cricket that got you there in the first place - is somehow unexciting. This is obviously a huge error, but an understandable one.

When a player is trying to break into international cricket, a county match - an essential step on a lifelong journey - is filled with hope and energy. After he has been dropped, the same county ground can feel lifeless and depressing. You can catch yourself making a fatal miscalculation: I've performed so often in this environment that I can turn it on again when it really matters.

But, sadly, form does not take orders from your surly ego. How quickly you forget that you did not coast to success in the first place, but committed to it wholeheartedly. In failing to do the same now, you are effectively asking yourself to play better than ever while kicking away the foundations.

	From the vantage point of retirement, you realise that the most enviable careers are not always the most successful in objective terms

There is, however, a healthier way of looking at a career (any career). Instead of seeing it as only a ladder that must be climbed - and resenting any reversals along the way - your career can be viewed as a sphere of experience. After all, life is really an accumulated store of experiences. And today - this ground, this match, this innings - offers the only experience available to us. We cannot play in matches taking place on other grounds, however much we want to.

Instead of seeing success only as an outcome - wearing a particular shirt, or playing in front of a certain number of spectators - success can be recast as a search for meaningful experience. How good can I be? How much can I give of myself? Can I enjoy the fact of caring deeply, even when it leads to disappointment? How unsparing can I be in the expectations I place on myself?

Let me use an analogy from my life now, as a writer. I write both books and articles (for different publications and outlets), so my work is published and distributed in a wide range of different formats. Sometimes the life of writer seems glamorous (a shiny new book or a cover story for magazine), other times it all feels very workaday. But the experience that matters - writing the words that I feel to be true, with the most clarity and honesty I can manage - remains entirely unchanged. It is my decision. I can choose to focus on the essence of the experience (the words) or the surface effects (the rewards).

So it is with cricketers and their stage. Instead of expecting the by-products to provide meaning, we can look for it in the experience itself. Whatever the level of the match, your job is the same: to respond to the ball. The method, too, remains unchanged: to achieve the right mixture of readiness and yet relaxation, the balance of hunger and indifference, the optimal blend of narrow focus and yet openness to the day, the middle ground between asserting conscious willpower and yet allowing it to happen.

Get into that space and you will rediscover the primacy of experience and the insignificance of surface effects. One of the rare pleasures of playing sport is deep concentration: back in that zone, the number of empty seats becomes an irrelevance. From the vantage point of retirement, you realise that the most enviable careers are not always the most successful in objective terms.

A career that is fatally hitched to external validation is doomed to disappointment: there will always be someone better than you, performing on a bigger stage, garnering greater reviews. But if they are looking over their shoulder, wondering if the world could give them still more prizes, while you are absorbed entirely in today's experience, then tell me: who is the more successful man?