 Then, we will talk about the automation of production process, how it generates the how it generates the advantage to the firm. So, division of lemurs promotes the invention of tools and machine which facilitate the supplement supplement the worker. So, if it is they are working a working on a project which fits to their skill they are fit to their expertise, generally that again promotes the invention of tools and machine which facilitate the supplement the worker. So, mechanization of the production method in large plant increases the labour productivity and leads to decreasing cost as the scale of output increases. So, whether it is a automation of production process, whether it is a mechanization of the process itself that takes that reduces the time that that increases the labour productivity because they are not doing it manually then now the production process is become automated. And what is the final outcome, final outcome leads to the decreasing cost as the scale of output increases. And if there is a decreasing cost that is nothing, but the economies of scale what the firm is enjoying. Then in case of production economies of scale in the sub category of labour economies scale we have one more point or maybe one more focal points where which brings some advantage to the firm that is cumulative volume economy. So, with the increase in the scale there is a cumulative effect on the skill of the technical personnel in particular. So, there is a increase in the scale and which leads to a which brings a cumulative effect on the skill of technical personnel in particular. So, production engineer, foreman and other production employee tend to acquire considerable experience from the large scale operation. So, cumulative volume experience leads to higher productivity and hence to reduce cost at a larger level of output. Now, what is this cumulative volume economy? Suppose you are working on a specific assignment specific task in a smaller way. When the production operations increases, when the size increases you are contributing to a larger scale and that again increases the higher productivity at that again leads to the higher productivity of the labour. And that is the reason if you look at that again leads to again leads to decrease in the cost and improve the efficiency and productivity of the firm. And that is how we can conclude that the cumulative volume experience leads to higher productivity and hence to reduce cost at a larger level of output. So, then we will come to the second type of production economy that is the technical economy. So, if you remember when we discussed about the production economies of scale it started with the fact that production economies of scale either come from labour or comes from the fixed capital or from the inventory. So, in the first case we discuss about the labour economies of scale where we discuss about the specialization, where we talk discuss about the time saving, where we discuss about the automation of production process and where we discuss about the cumulative volume economy. Now, we will see that there is one more point that is the technical economies that is the sub category of production economies where the economies are associated with the fixed capital which includes all type of machinery and other equipment. So, specifically technical economies is one where the producer gets the advantage the cost advantage from the fixed input that is all type of machinery and other equipment or we can call it also fixed capital. So, it arrives either from specialization and indivisibility of capital or from the set up cost or from the initial fixed cost or technical volume input relationship or reserve capacity requirement. So, these are the factors from which generally with the firm or the producer get the technical economies of scale. So, let us analyze all this factor one by one. So, what is the first factor comes here? The first factor comes here is the specialization and indivisibility of capital. So, technical economic result from the specialization of capital equipment which becomes the possible at the large scale of production and from the invisibility which are a character of the modern industrial technique of production. So, one if you look at the machine it is specific the assignment is specific by the machine. So, the it is like the specialization of the labor similarly the specialization of the capital equipment or machine which becomes possible at the large scale of production not at the small scale of production. And when it is possible at the large scale of production obviously it leads to the productivity. It is from the the technical economies also comes from the indivisibility which are a character of the modern industrial technique of production. Because if you look at the machine as such a large that you cannot make them or you cannot divide them for a in a small small way for the smaller level of output. Like typically the assembly line if you look at it is fit for a size you cannot make it a as a part of it. Modern technology is as I said it is a higher degree of mechanization mainly it is a capital intensive production method because it is a large scale of production. We talk about the automation of production process. We talk about the high cap high and capital equipment. We talk about the mechanization we talk about the we talk about the high end technology that leads to the if you look at that is the part of the modern technology. And if you look at these are all high overhead cost, but when it comes to the average cost it has the lowest average cost because there is in term of the productivity and in term of their performance. So, when it is a case of the low level of output higher average fixed cost is more than upset the lower level cost. So, initially when such a high end technology high end machinery high end may be the automation as a whole or high end about the capital equipment this is the fixed cost is more specifically at a low level of output and the higher average fixed cost more than upset the lower level cost. But once the scale is reached once there is a large scale once the scale is reached and we can call it say appropriate scale the highly mechanized and specialized technique becomes profitable. Because why it is profitable because the in the large scale generally the fixed cost gets spread over the larger level of output and in general the unit cost comes down which leads to the economies of scale or the cost advantage for the firm. Then we will take out the second factor that is setup cost how it brings the technical economy. So, cost involved in the preparation of multipurpose machinery for performing the particular job or product that is generally the setup cost. So, cost involved in the preparation of the multipurpose machinery for performing a particular job or product and typically if you look at the example of a motor car industry or a firm producing the electrical household equipment in the use of general purpose machine is quite common because the setup cost is very high. So, if you look at if you again come down to a specific case like a metal stamping press which produces frames and the various component of the final product and the metal stamping press has to be reset anytime that a particular car has to be produced. So, setup cost is one which is generally required for the high end equipments and if you look at the typical example of a metal stamping press it has to be reset anytime that a particular part of car has to be produced. For example, different setups are required for producing the doors, the roof, the wings of a car and each setup involves a considerable time and cost. So, when it comes to setup cost if the if it is a case of only one car then again the average cost or the total cost is on a higher side. But if it is a case of the large scale output maybe it is a case of the number of cars the larger the scale of the output the more a multi-purpose machine is left to one setup and hence resetting become less frequent which are the source of technical economies of scale. So, the understanding is that setup cost is required for the any high end cost or the high end capital equipment or high end machine. But even if it requires a setup for the different process different even intermediate product the cost is on a higher side. But once the scale of operation increases the larger the scale of the output the more a multi-purpose machine is left to is to one setup and has resetting become less frequent. So, one setup all door will get produced another setup wing will get produced or maybe another setup the frame will get produced. So, if it is large scale in one setup if the units are more the average the average setup cost goes down with each unit of output. But if it is a small small plant or the small company where the unit of output is less in that case generally the setup cost cannot be spread over a larger amount of output and that is the reason the overhead cost for each unit of output generally on a higher side for a small scale. But larger scale they get a cost advantage because for one setup they produce a number of unit of output and which is a source of the technical economies of scale. Then we will talk about the next factor that is the initial fixed cost how initial fixed cost also we can we also get a cost advantage from the initial fixed cost of a large scale operation. So, it is usually involving starting a business or introducing a new product. So, if you look at what is the initial fixed cost fixed cost when either when you are starting a business you need you need a fixed cost you need a maybe the startup money or startup equipment or introducing a new product where the where the technicalities are different you need to get in maybe new type of capital equipment you need to get new set of main power you need to use a new technology. So, research and development expenditure the so typical example of fixed cost is research and development expenditure cost of market exploration design cost of the products are generally the comes under the initial fixed cost. So, these are all how it can be taken in case of a large scale operation larger the scale of output the lower the unit cost of such fixed expenses because it is spread over the different unit of output. So, larger the scale of the output lower the unit cost for such fixed expenses. Then we will take out one more factor under technical economic scale that is technical volume and input relationship. So, technical economy also arise from some technical geometric relationship between the particular equipment and the inputs request to produce and install it. So, there are few important in the process industry like include special equipment such as storage tanks, reaction chambers and connecting pipes and in what context we are discussing this we are discussing this that what is the volume of output and what is the input relationship whether it is being cost advantage to the firm or not. So, if you look at there are few factor that is important in the process industry it includes special equipment such as storage tank, reaction chambers or the connecting pipes. The material and labor cost for each this type of the inputs you can call it inputs. The materials and the labor cost of constructing such plants are proportional to the surface area they occupy. So, it is proportionally the cost is proportional to the surface area and the volume capacity which determines the level of output of the plant increases more than proportionately as the area increases. So, material and labor cost their proportionality related to the surface area of the plant they occupy and the volume capacity which determines the level of output of the plant generally increases more than the proportionately as the area increases. Now, the technical cost of the unit capacity like whether you talk about the storage tank whether you talk about any other reaction chamber the technical cost of unit capacity of installing such industrial plant falls as the output capacity increases. At least up to the point where equipment becomes so large as to require stronger material and special construction in order to make the large plant shape. So, the larger the scale may be the equipment whatever comes they also requires a stronger material and special construction in order to make the larger plant shape and there they get the cost advantage because the scale of operation increases. Then the we will come to the last factor under the technical economy and this is the reserve capacity requirement. So, firm always wants some reserve capacity in order to avoid the disruption of their production flow when breakdown of machinery occurs. Now, what is the need of this reserve capacity requirement? The reserve capacity is generally cap because if in case of machine breakdown in case of may be a labor force strike in case of any eventuality at least the flow of the goods and services should go to the market and that is how the all the firms they keep some amount of the capacity as reserve and we will see that from the reserve capacity requirement how the economies of scale is generated. Firm always wants some reserve capacity in order to avoid disruption of their production flow when breakdown of machinery occurs. So, there may be a possibility of disruption of their production flow maybe because of failure of the raw material failure of of technology failure of machine where the breakdown of machinery generally occurs. A small firm which uses the single large machine will have to kept keeps two such machine if you wants to avoid disruption from the breakdown because there is only one large machine which produces the entire requirement of the small firm. Now, for the reserve capacity requirement what they have to do they have to keep the another large machine as the backup, but in case of but in case of large scale how it works in case of large scale anyway there are number of machines. So, if there is a breakdown in one the production flow never stops there generally it goes because the other machines are the may be the other machine they are still producing the product. So, in this case the reserve capacity requirement is comes from all the machine not from a single machine. So, in order to keep the reserve capacity requirement a small firm has to invest more in order to keep one large machine again as the backup in case of the breakdown of the machinery. But in case of large firm since there are number of large machinery already in place if there is no need to keep the reserve capacity requirement or there is no requirement for the reserve capacity because if one machine breakdown the whatever the production comes from that machine can be taken from the other machine either by over producing or may be increasing the quantity whatever they are producing. And in this case if you look at the cost of production decreases because it is not that you need to do again it is a initial fixed cost variable cost to run that machine or may be you are not getting a loss because there is a decrease in the output rather that is getting cover in the other machine and that is why the that is another source of technical economics that comes from the reserve capacity requirement to the real economics of scale. Then we will talk about the third source of production economics of scale and what is the third source of production economics of scale? If you remember production economics of scale comes either from labour or from the capital or from the or from the inventory. So, we can call that the now we will check the third one that is the inventory economy and this inventory economy also called as a stochastic economy. And why it is called as stochastic economy? Because the role of inventory is to meet the random changes in the input and the output side of the operation of firm. This is called as stochastic economy because what is the role of inventory? The role of inventory is to meet or the capture the random change in the input and the output side of the operations firm. It it is not may be the regular may be it is a random kind of thing. So, stock of raw material do not increase with scale, but not proportionately. Stock of raw material increase with scale means if you are producing 100 units, you keep 10 units as the stock of the raw materials. If you produce 1000 units, obviously, you need to keep some amount which is more than 10 units as the stock of raw materials, if you are production capacity or if the production level is 1000 unit. So, the point here is the stock of raw material do increase with the plant size, but not proportionately. So, ideally what would have been situation? If 10 units as the stock for 100 units of output, then 100 units should be stock for 1000 units of output, but in reality that does not happen. It increases from more than 10, but it never reached 10, because it is not proportional increase in the with the scale of this with the scale of the output. So, random fluctuation in the supply of such input are generally smooth out with the stocks which size need to change less than the size of the firm. And when it is possible, this is possible in case of a large scale operation. So, stock of raw material increases, but not proportionately, but if there is a random fluctuation in the supply of such input, supply of such raw material that smooth out with stock with size need change less than the size of the firm. And this is only possible in case of large scale and that is how we get a economic of scale or we get the advantage of economic scale in case of the inventory economy. Now, what happens on the demand side? Random changes in the demand of customer will tend to be smooth out as the plant increases. So, what random changes in the supply can be taken from the stock of the raw materials and on the demand side random change in the demand of the customer will tend to be smooth out as the plant increases. The larger the number of customer, the more random fluctuation of the demand tends to upset the peaks and recession thus allowing the firm to hold a smaller percentage of its output to meet the random changes. So, if we look at when it comes to the demand side, it is not either at the peak or at the low. So, when you average out the peak and low random fluctuation from the demand side ideally firm should not keep the stock on the basis of either peak or the from the boom. And in this case, it generally average out the fluctuation on the higher side and fluctuation on the lower side. And that leads to or align the firms to hold a smaller where the percentage of its output to meet the random changes because the random changes can go in the positive direction and also can go in the negative direction. Then we will talk about the second kind of economies of scale that is selling and marketing economy. So, the under real if you remember the types of economic one is real economy, second one is the pecuniary economy and under real economies we talked about the production economies, we talk about the we will talk about the selling and marketing economy. And in case of production economies, we talk about the technical labor economies of scale, technical economies of scale and inventory economies of sale because production economies of scale generally come from the labor capital equipment or the inventory of the firm. So, in case of second case of the economies of scale under real economies of scale, this is selling and marketing economy. Selling and marketing economy generally associated with the distribution of the product of a firm. It comes from the advertising economies of scale not only new firm also existing firm. So, when you talk about advertising it is not about only for the new firm, but also for the existing firm. Why advertising is also for the existing firm? Because when the existing firm either they launch a new product or for their existing product to keep fresh in the memory of the consumer they at least to certain point of the certain level of advertisement. So, this advertisement cost is also applicable to the existing firm who are launching a new product or for the existing product if there is some updates or just to keep fresh in the memory of the consumer. So, advertising space and time increases less than proportionality with scale. So, advertising cost per unit of output falls with the scale and advertising budget is usually decided on the basis of available firm profit similar activities of competitor rather than on the basis of output. So, advertising space and time increase less than proportionately with scale. So, that leads to the per unit cost of average advertising cost generally falls with the scale and larger the output smaller the advertising cost per unit. Because whether it is for one product maybe the advertising cost is on a higher side, but when it is more more kind of product it comes from one company they just to a one company may be campaigning kind of thing and that takes care of the product whatever is getting produced by the company. Or the other way if the advertising cost is for the lower unit of output even if it gets spread still the average cost is on a higher side, but when it gets spread over a longer spread over a longer or the larger level of output generally that average cost comes down. Because the advertising cost remains same irrespective of whether it is for 100 units or whether it is for the 1000 unit, but when it comes to benefit always the economies of scale comes from 1000 units of output not from the 100 units of output. Similarly, if you look at there are some other activity like other selling activity like salesman force, the distribution of sample etcetera such small scale promotion expenditure increases by less than proportionality with output at least up to a certain scale in case of the large scale output. Then there is a third factor that is selling and marketing economy that is the economics from spatial arrangement with exclusive dealer. So, large firm can enter the exclusive agreement with distribution who undertake the obligation of maintaining a good service department for the product of manufacture. So, automobile industry where the dealer builds up the garages and the keep regular stock of the spare parts of various models, the buyers of durable pays lot of attention to the availability of spares and good servicing shop for the brand they buy. So, if you look at in case of exclusive arrangement with dealer that leads to some reduction in the cost of production because the dealer is taking care of the some after sale service what has to be either has to be taken care of the by the firm itself. Then we talk about one more factor that is model change economy and if you look at there is a need to change the style of the product to meet the demand of customer which is ever increasing and the competition with the rival firms which involves considerable expense of R and D and new materials and equipment because you need to change the model you need to change the style. The spreading of such overhead is lower per unit if the scale of output is larger even if the initial fixed cost is high even if the capital equipment even if the raw material even if the labour require is high, but the cost gets spread for a larger unit of output and that brings some economies of scale to the some economies of scale to the firm. If you look at there is a general agreement that large scale marketing in case of generally large scale market economy do exist, but at least up to a certain size of land. But there is some amount of disagreement exists as to whether the average selling cost curve turns at very large economies of output or whether the unit selling cost fall continuously with scale. So, given the technical cost of production falls with the scale the total average cost may eventually turn upward if selling this economy do exist after a certain plant size. So, we will stop here today and we will discuss in the next session about two more type of economies of scale that is managerial economies of scale and transport and storage economies of scale. Then we will spend some time on the pecuniary economies of scale and we will check that whether this economies exist at any point of time for a specific plant and if it exist if this economies exist may be what are the factors or what is the reason behind this. Then we can continue our discussion in the next session the whatever the part left in the economies of scale.