Unit 5: Production

UNIT 5: PRODUCTION
OBJECTIVES
• Describe the effects of the growth of small firms.
• Explain the difference between ‘economies of scale’
and ‘diseconomies of scale’
• Describe the different types of economies of scale
• Identify types of economies of scale after analysing
various scenarios
• Outline factors of diseconomies of scale after
analysing a case.
• Differentiate between mechanization and
automation.
TOPIC 1: EFFECTS OF
GROWTH
GROWTH EFFECTS
GROWTH EFFECTS
As sales increase, the business can change
from a domestic level of production to
surplus and export. The business will
experience benefits as well as
disadvantages from this growth.
ECONOMIES OF SCALE
When more units of a good or a service can be

produced on a larger scale, yet with (on average)
less input costs, economies of scale (ES) are
said to be achieved. Alternatively, this means that
as a company grows and production units
increase, a company will have a better chance to
decrease its costs.
ECONOMIES OF SCALE IN A NUTSHELL
Economies of Scale is all about

finding ways to save on cost in
all aspects of the business and
while producing more goods or
services.
ECONOMIES OF SCALE
INTERNAL ECONOMIES EXTERNAL ECONOMIES
• Technical Economies • Specialist Workers

• Financial • Specialist training
• Managerial • Supporting firms
• Marketing • The good reputation
• Purchasing • Research and
• Risk Bearing development.
ECONOMIES EXPLAINED
Managerial Economies – when a firm expands its
output or enlarges the scale of production, following
the principles of division of labour and specialisation
to create various departments. Example, Sales,
Marketing, Finance, Production, etc.
ECONOMIES EXPLAINED
Technical Economies – when a firms increases its
production by using large machines, reducing the
need of manual labour and high labour cost.
Financial Economies – Interest rates are often lower

for larger firms than small firms; easier to get loans.
ECONOMIES EXPLAINED
Purchasing Economies - When businesses
make large purchases or borrow a lot of
money, unlike small purchases and loans, they
get special discounts.
ECONOMIES EXPLAINED
Marketing Economies- promotional and
advertising campaigns are one of the priciest
things in business. However, these costs are
fixed and if the organization decides to grow,
from time to time, it can reduce the overall
money spent on marketing.
ECONOMIES EXPLAINED
Risk-bearing economies - When a company is large, it
becomes possible to produce several products that may
also be unrelated.
• For instance, Google manages several products like
Gmail, search engine, Google Drive, Google AdSense,
Android, etc.
• If any of them fail, for example, let’s take Gmail, it won’t
be a disaster for Google because they still have several
chains of income.
EXAMINE THE SCENARIO AND STATE THE TYPE OF
ECONOMIES OF SCALE ENJOYED BY THE FIRM.
Carib Cement Company a Technical Economies

private limited company
became a public limited Managerial Economies
company in 1990. The
Risk-Bearing Economies
increase in capital meant that
the company was able to Financial Economies
change its operation using
more mechanical operations. Marketing Economies
Production increased Purchasing Economies
tremendously.
Carib Cement Company Technical Economies

Limited was able to enter into
numerous lease arrangements Managerial Economies
with Caribbean Governments Risk-Bearing Economies
for the mining of limestone
and, thus, able to obtain Financial Economies
limestone in bulk. Marketing Economies
Purchasing Economies
The Company is also a Technical Economies

member of the Association of
Cement Producing Managerial Economies
Companies. This association Risk-Bearing Economies
advertises on behalf of all its
members. Financial Economies
Marketing Economies
In order to purchase two Technical Economies

more mixers, the company Managerial Economies
used its assets to obtain a
large loan at a very Risk-Bearing Economies
economical rate. Financial Economies

Marketing Economies
• The company is trading Technical Economies

on the Stock Exchange Managerial Economies
and, therefore, the Stock
Exchange Commissioner Risk-Bearing Economies
closely monitors its Financial Economies

viability.
Marketing Economies
The increase in capital meant that the firm had more

money to engage in research and development and
enjoy specialist staff. The company became more
efficient.
External Economies- Specialist Worker, Research and

Development
DISECONOMIES OF SCALE
DISECONOMIES OF SCALE
As the company
grows, it sees an
increase in
marginal costs
when output is
increased.
Economies of Diseconomies
Scale of Scale
Production
INCREASES
INCREASES
Cost
INCREASES
REDUCES
Output
(Finished Production Output
Cost (Finished
Goods)
Goods)
Using the information in the case study below, identify ANY SIX
the factors of diseconomies of scale experienced by Alecon
Georgeson and Sons Ltd.
Alecon Georgeson and Sons Ltd is a manufacturing firm,

which produces household detergent. Five years ago the
firm began to manufacture liquid detergent. Today, the
company’s production line includes body soaps, oils, lotions,
cosmetics, industrial detergents and fragrances. To
accommodate the expansion, divisional heads and
specialists were employed for each department. The
managerial cost increased by over 300 percent. The head
office was moved to the city and the workers complained
about conflicting information from head office that was given
to them by their supervisors.
Scenario continues
The company experienced its first industrial dispute last month

when worked staged a ‘sick out’ because there were not paid
their shift bonus time. Sales declined because their customers
were of the view that the quality of the products was poor and
there were too few distribution outlets. The company, therefore,
engaged the services of a marketing firm to improve its image.
The company initially was the backbone for the community

project but because of rapid expansion, the funding of the
much-needed community was not forthcoming. At the same
time, the company continued to pour all its waste into the rivers
and streams forcing the environmental authority to issue two
warnings to the company.
HOMEWORK
Explain the difference between labour

intensive and capital intensive automation
and mechanization. industries, give an
example of an industry. Differentiate between
mechanization and automation.
See you next
class!
Remember to
do you
homework!

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UNIT 5: PRODUCTION

When more units of a good or a service can be

Economies of Scale is all about

INTERNAL ECONOMIES EXTERNAL ECONOMIES

• Technical Economies • Specialist Workers

Financial Economies – Interest rates are often lower

Carib Cement Company a Technical Economies

Carib Cement Company Technical Economies

The Company is also a Technical Economies

In order to purchase two Technical Economies

economical rate. Financial Economies

• The company is trading Technical Economies

closely monitors its Financial Economies

The increase in capital meant that the firm had more

External Economies- Specialist Worker, Research and

Alecon Georgeson and Sons Ltd is a manufacturing firm,

The company experienced its first industrial dispute last month

The company initially was the backbone for the community

Explain the difference between labour

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