Scale of production: Large-scale production is a crucial aspect of modern industrial society. The size of business undertakings has significantly expanded as a result. There are some benefits to large-scale production that contribute to lower production costs.

Large-scale production-related economies can be divided into two categories: internal economies and external economies. 

Internal economies are those forms of production that a company gains when it expands its output in order to lower its cost of production and improve its ability to compete successfully in the market. Internal economies only occur as a result of endogenous factors related to an entrepreneur’s managerial skills, efficiency, type of machinery used, or chosen marketing approach. These economies develop within the firm and are only available to the expanding  firm. Internal economies are economies enjoyed by a firm on account of the use of a greater degree of division of labor and specialized machinery at higher levels of output. They are internal in the sense that they accrue to the firm due to its own efforts.

Internal economies and diseconomies: returns to scale increase in the initial stages, and after remaining constant for a while, they decrease. The question arises as to why we get increasing returns to scale due to which costs fall and why, after a certain point, we get decreasing returns to scale due to which costs rise. The answer is that initially a firm enjoys internal economies of scale, and beyond a certain limit it suffers from internal diseconomies of scale.

The following are the main kinds of internal economies :

• Technical Economies 
• Managerial Economies 
• Commercial Economies 
• Financial Economies 
• Risk bearing Economies 

Let us understand each one of these points:

Technical economies: Large-scale production is associated with economies of superior techniques. It becomes possible for the company to use more specialized and efficient forms of all factors. As the firm increases its scale of operations, especially in capital equipment and machinery, For producing higher levels of output, there is generally available a more efficient machinery which when employed to produce a large output yields a lower cost per unit of output. The firm is able to benefit from composite technology, in which the entire process of producing a commodity is carried out as one composite unit. Second, as production scale increases and labor and other factors increase, it becomes possible to introduce increasing levels of specialization and division of labor, which lowers the cost per unit. There are some advantages available to a large firm on account of the performance of a number of linked processes. By implementing various procedures from the initial input supply stage to the final output stage, the company may reduce the inconvenience and costs related to the dependence on other firms.

Managerial Economies: Reduced managerial costs are referred to as managerial economies. Specialization and the division of labor can be applied in management when output increases. It becomes possible to divide its management into departments with specialized staff, such as production managers, sales managers, financial managers, etc.If the scale of production increases further, each department can be further subdivided; for e.g.the sales department may be split into separate sections for advertising, exports, and customer service. Management’s efficiency and productivity will significantly increase because individual operations are under the supervision of specialists.Decentralization of decision making and mechanization of managerial functions further enhance the efficiency and productivity of managers. Thus, specialization of management enables large firms to achieve a reduction in managerial costs.

Commercial economies : huge quantities of components and materials are needed for the production of large volumes of items. Buying in bulk might result in lower rates for materials and components for a large firm. Economies can be made in the product’s marketing as well. Additional output can be sold for little to no additional cost if the sales staff is not being worked  to their full capacity. Large businesses can also profit from advertising campaigns. Production scale causes a decrease in the cost of advertising per unit of output. In addition, a large firm may also be able to sell its by-products or process them profitably, something that might be unprofitable for a small firm. There are also economies associated with transport and storage.

Financial Economies: A large firm has an advantage over a small firm when it comes to obtaining financing for its business activities. For instance, it might provide bankers with improved security and make obtaining advances easier. Because huge companies have a higher reputation, investors have more faith in them and prefer their shares because they are easier to sell on the stock exchange. Therefore, a large firm may raise financing at a lower cost.

Risk bearing economies:

Risk bearing economies: It is said that a large business with diverse and multi- production capability is in a better position to withstand economic ups and downs and, therefore, enjoy economies of risk bearing.

Internal Diseconomies: But after a certain point, a firm experiences net diseconomies of scale. This occurs because expanding the plant’s scale would result in significant long-term costs due to management challenges once the firm has grown to a size that allows utilization of nearly all labor-dividend possibilities and employment of more efficient machinery. When an operation’s scope grows out of control, it is difficult for management to maintain control and implement effective coordination. If the scale of production exceeds a certain point, managerial diseconomies begin to emerge. Communication at different levels, such as between managers and workers and among managers, becomes challenging, which causes delays in making choices and putting those decisions into action. Controlling and establishing coordination among the management’s many departments is a challenge. The managerial structure becomes more complex and is affected by greater bureaucracy, lengthening of communication lines, and so on. All these affect the efficiency and productivity of management and that of the firm itself. Commercial economies become diseconomies after an optimum scale. For example, advertising expenditure and other marketing overheads will increase more than proportionately. after the optimum scale. The cost of raising finance will rise more than proportionately after the optimum scale of production. This may happen because of a relatively greater dependence on external finances. However, risk may increase if diversification, instead of giving a cover to economic disturbances, increases.