Internal Economies Changes

Internal Economies Changes

Internal Economies, changes in the scale of operation within a given firm or plant which lead to reductions in the unit cost of production: thus contrasted with external economics. Most internal economies arise in the use of indivisible' fixed factors of production which are most efficiently employed at high levels of output and for which there are no substitutes that can be used to produce smaller outputs (or for which the 'small-scale' substitutes are disproportionately inefficient). In a similar way internal economies will be reaped when a large financier is able to raise finance more easily and more cheaply than a small firm, and when a large buyer of (say) a raw material is able to buy more cheaply than a small buyer (except when these advantages arise from the exercise of monopoly power). Some economies of scale may be less obvious and less easily measured, e.g. when a firm employing many workers is able to attract a higher general quality of staff because it is able to offer better promotion prospects than the small employer. If there were no limit to internal economies firms would continue to grow indefinitely and the small firms in an industry would be eliminated. In practice diseconomies of scale may sooner or later counteract economies of scale. The most significant diseconomies probably arise from the incapacity of managers to co-ordinate efficiently the widening range of activities performed on a very large scale in growing firms.

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