Important types of internal economics are listed below:
Types
(i) Labour economies:
When the scale of industrial output is expanded the possibilities of division of labour are increased thus reduce the labour cost per unit.
This economy through division of labour comes due to the following reasons: (i) increase in the skill of workers and (ii) saving of time involved in changing from one operation to another.
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Besides, in many cases a large firm can find it economical to have a number of operations performed mechanically, rather than manually.
These economies will be the greatest in the concerns where products are complex and the manufacturing processes are capable of being sub-divided
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(ii) Technical economies:
These economies are the results of the use of big size machines and such scientific processes as can be carried out in large production units.
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Small establishment cannot afford to utilities such machines or processes for their use. They will bring a saving only when they are used intensively.
(iii) Managerial economies:
With the increase of the size of the firm, the efficiency of management usually increases as there can be greater specialization in managerial staff.
In large concerns, experts can be appointed to look after various sections or divisions of the industry such as purchasing, sales, production, financing, personnel etc.
But a firm having small means cannot hope to have a full time employment to such experts. Normally the different aspects of the concern have to be looked by a few persons only who may not be experts.
(iv) Marketing economies:
As for its purchase and sale, a large concern can have more economies. It can buy its necessities in large amount and on better terms.
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Very often it gets quick and safe delivery, careful attention and special facilities from its suppliers.
Similarly from the transport agencies special concessions are secured for bulk movement of goods and raw materials.
Expert buyers can be appointed and so also with the appointment of expert salesmen, the business is bound to progress.
A large scale concern can also afford to spread its advertisement costs over bigger output. These costs do not go up in proportion to a rise in sales.
(v) Economies of vertical integration:
A large concern may decide to have vertical integration by joining a number of stages of production.
This integration has the advantage that the flow of goods through various stages in production processes is more readily restrained.
Continuous supplies of raw materials, on one side, and steady outlets for these raw materials on the other, make production planning more certain and less subject to erratic and unpredictable changes.
It may also facilitate cost control. Transport costs may also be minimized by such planning. Transportation and cross hauling is reduced to the minimum.
(vi) Financial economies:
A large firm can offer better security and is, therefore, in a position to secure better and easier credit facilities both from its suppliers and its banks. Due to better image, it enjoys also easier approach to the capital market.
(vii) Reduction of risks:
The large the size of the business, the greater is the scope for diversification and spreading of the risks. Diversification works on two lines:
(a) Diversification of output:
If there are several products, the loss in the sales of one product may be overcome by the profits from the others.
By diversification the firm avoids what may be called ‘putting all the eggs in the same basket.
(b) Diversification of market:
Generally the larger producer is always in a position to sell his products in many different and even far off places.
If he depends upon single market, he runs the risk of heavy losses, especially when the sales in the market decline for some reason or the other.