Scaling Up: Understanding the Different Types of Economies of Production

Subject: Economics
Class: SS 1
Term: First Term
Week: 10
Age: 14-16 years
Topic: Scale of Production
Sub-topic: Definition, Types of Scale (Internal Economies and Diseconomies, External Economies and Diseconomies), Classification of Internal Economies, Limitations to Scale of Production
Duration: 80 minutes

Behavioral Objectives

By the end of the lesson, students should be able to:

1. Define scale of production.
2. Identify and explain the types of economies and diseconomies of scale.
3. Classify internal economies of scale.
4. Discuss the limitations of scale of production.

Keywords

• Scale of Production
• Economies of Scale
• Diseconomies of Scale
• Internal Economies
• External Economies
• Limitations of Scale

Set Induction

The teacher will ask the students to compare a small local bakery to a large commercial bakery, considering which might produce goods at a lower cost and why.

Entry Behavior

Students have previously learned about production processes, including factors of production, which will help in understanding scale of production.

Learning Resources and Materials

1. Diagrams illustrating economies and diseconomies of scale.
2. Charts listing types of internal and external economies.
3. Real-life examples of businesses with different scales of production (e.g., small businesses vs large corporations).

Building Background/Connection to Prior Knowledge

Students are familiar with production processes and the relationship between production and cost.

Embedded Core Skills

• Critical thinking
• Problem-solving
• Communication

Learning Materials

1. Flashcards with key terms (economies of scale, diseconomies of scale, internal and external economies).
2. Visual aids showing different scales of production in various industries.

Reference Books

1. “Economics for Senior Secondary Schools” by Adegoke
2. Lagos State Scheme of Work for Economics

Content

1. Scale of Production

• Definition: The scale of production refers to the level or size of production in a business. It can range from small-scale production, such as that of a small business, to large-scale production in factories or corporations.

2. Types of Scale

• Internal Economies of Scale:
  • These occur within a company as it expands. Larger firms can achieve lower costs per unit as they produce more.
  • Examples include specialization of labor, mass production, and use of more advanced machinery.
• Diseconomies of Scale:
  • These occur when a company becomes too large, and the cost per unit starts to increase. It happens due to inefficiency in management, coordination, and resource allocation.
  • Examples include poor communication, excessive bureaucratic control, and low employee morale.
• External Economies of Scale:
  • These occur outside a company but benefit the company as the industry or market grows.
  • Examples include the development of better infrastructure, access to skilled labor, and suppliers’ efficiencies in the area.
• External Diseconomies of Scale:
  • These occur when the growth of an industry in a particular location leads to higher costs for all firms in that area.
  • Examples include congestion, environmental degradation, and increased competition for resources.

3. Classification of Internal Economies of Scale

• Technical Economies: Larger firms can afford advanced machinery and technology that smaller firms cannot.
• Managerial Economies: Larger firms can employ specialized managers for different departments, improving efficiency.
• Marketing Economies: Larger firms can spread the cost of advertising and marketing over a greater volume of goods.
• Financial Economies: Larger firms often have better access to credit and lower interest rates.
• Purchasing Economies: Large firms can buy raw materials in bulk at lower prices.

4. Limitations to Scale of Production

• Market Size: There must be a demand for the goods or services produced, so very large scale production may lead to oversupply if the market size is limited.
• Technological Constraints: Sometimes, advanced technology may not be available or affordable, limiting the ability to increase production.
• Management Complexity: As firms grow, managing and coordinating activities becomes more difficult, leading to inefficiencies.
• Resource Limitations: Some resources, like skilled labor or raw materials, may not be available in sufficient quantities to support large-scale production.
• Environmental and Legal Factors: Larger firms may face stricter regulations or environmental constraints, which can limit growth.

Presentation Steps

Step 1:
Teacher’s Activities: Introduce the concept of scale of production and explain the differences between small-scale and large-scale production.
Learners’ Activities: Students identify examples of businesses they know that operate on small or large scales.

Step 2:
Teacher’s Activities: Explain internal and external economies of scale, illustrating with real-world examples like car manufacturing and the tech industry.
Learners’ Activities: Students discuss other industries where economies of scale might apply.

Step 3:
Teacher’s Activities: Describe diseconomies of scale and give examples like large government bureaucracies or large factories.
Learners’ Activities: Students reflect on the challenges of managing large organizations.

Step 4:
Teacher’s Activities: Explain the limitations to scale of production, focusing on market size, resource availability, and management challenges.
Learners’ Activities: Students give examples of limitations they have observed in businesses or industries.

Assessment

1. What is the scale of production?
2. Explain internal economies of scale.
3. What are external diseconomies of scale?
4. List one example of technical economies.
5. What is a limitation to large-scale production?

Conclusion

The teacher will summarize that scale of production impacts both the costs and efficiency of firms. While large-scale production can reduce costs through economies of scale, it also has limitations, especially in managing resources and market demand.

“Learn about scale of production, including internal and external economies of scale, diseconomies, and limitations. Understand how businesses grow and face challenges.”

Fill-in-the-Blank Questions

1. The ________ of production refers to the level or size of production in a business.
2. ________ economies of scale occur within a firm as it increases in size.
3. ________ diseconomies of scale occur when companies become too large and face inefficiencies.
4. External economies of scale occur outside a ________ but benefit the company.
5. A firm’s ability to purchase goods in ________ is an example of purchasing economies.
6. ________ economies of scale occur when large firms can use better machinery.
7. One limitation to scale of production is limited ________ size.
8. As a company grows, managing it becomes more ________.
9. Larger firms have an advantage in accessing ________ at lower interest rates.
10. ________ diseconomies of scale refer to the negative effects of industry growth in a location.
11. A firm may face ________ constraints when trying to grow larger than its available resources.
12. ________ economies refer to the spread of marketing costs over larger production.
13. The ________ of large firms may lead to problems with employee motivation.
14. ________ economies involve the use of specialized managers for different tasks.
15. The growth of a business may lead to greater ________ for resources.

FAQs with Answers

1. What is scale of production?
   Scale of production refers to the size of a business or industry in terms of output or production capacity.
2. What are economies of scale?
   Economies of scale are the cost advantages that businesses experience when they increase their scale of production.
3. What are diseconomies of scale?
   Diseconomies of scale occur when a business grows too large, leading to higher costs per unit due to inefficiency.
4. Can you give an example of an internal economy of scale?
   An example is technical economies, where larger firms can afford better machinery to improve productivity.
5. What is an external economy of scale?
   External economies of scale occur outside a business but benefit it, such as improvements in infrastructure or industry-specific labor.
6. What are external diseconomies of scale?
   External diseconomies occur when industry growth causes negative impacts, like congestion or environmental damage.
7. How does management complexity relate to diseconomies of scale?
   As a company grows, managing all the departments and processes becomes difficult, leading to inefficiency.
8. What are purchasing economies of scale?
   Purchasing economies happen when large firms can buy raw materials in bulk at lower prices.
9. Why might a business face limitations to scale of production?
   Businesses may face limitations due to market size, resource constraints, and technological limitations.
10. How does market size limit scale of production?
    If there is not enough demand for the product, large-scale production could lead to oversupply and loss of profit.
11. What is a limitation of external economies of scale?
    External economies may not apply to all businesses, depending on the industry or location.
12. How does technological constraints limit the scale of production?
    Sometimes, available technology may not allow for further scaling of production.
13. What is financial economy of scale?
    Financial economy of scale refers to the advantage larger firms have in securing loans at better interest rates.
14. How does employee morale impact economies of scale?
    Large businesses may struggle with maintaining employee morale, leading to inefficiencies and higher costs.
15. What happens when a company faces diseconomies of scale?
    The company’s costs per unit rise as it becomes too large, leading to inefficiencies.

Evaluation Questions

1. Define scale of production.
2. What are internal economies of scale?
3. Explain the concept of diseconomies of scale.
4. What are external economies of scale?
5. Give two examples of internal economies of scale.
6. What happens when a firm faces diseconomies of scale?
7. How can external diseconomies affect a company?
8. What limitations might prevent a firm from scaling production?
9. What is the role of technological advancements in economies of scale?
10. How does a larger firm benefit from financial economies of scale?