Internal economies are associated with the expansion of the scale of output of the firm itself. They are not derived indirectly as a result of expansion of the industry to which it belongs. Listed below are some of the leading sources of such economies.
1. Managerial Economies:
These economies arise on account of the scope of employing better qualified and trained managers and other employees who are able to take quicker and more profitable decisions. In addition, management experts are exploring new methods of improving the management of the firm and reducing its cost of operations.
2. Financial Economies:
It is a common knowledge that most firms have to depend upon borrowed funds. The lenders, while deciding the rate of interest to be charged on their loans, give due importance to the ‘creditworthiness’ of the borrower. And other things being equal, bigger firms enjoy greater creditworthiness than the smaller one. Accordingly, they are able to borrow funds at lower interest rates. For the same reason, they have also the option of raising additional sources through equity capital.
3. Technical Economies:
With an increase in the scale of output, the choice of input its and their varieties becomes wider for the firm. It can go in for those machines and equipment etc. which have a higher marginal productivity as compared with their cost. In other words, it is possible to get a larger output per unit of cost incurred on them.
An increase in the scale of output also generates bigger flows of wastes. When the scale is small, the firm is not able to use these products for additional earnings. However, when the generation of waste crosses a critical limit, it often becomes possible for the firm to produce certain bye-products or sell off the waste to other firms and thus add to its income.
5. Better Utilization of inputs:
Various inputs, particularly machines and equipment are lumpy and indivisible. They also require time intervals for ‘maintenance’ and ‘servicing’ etc. Any one of them can go out of order and require repairs. If a machine goes out of order, or is otherwise not able to operate, then a firm with a small scale is not able to find its substitute and its production suffers.
For example, if a transport company has only one truck and that needs some repair, its employees are left unemployed for the time being, though the firm has to pay them all the while. In contrast, a firm with a bigger scale is able to adjust the availability of its machinery, equipment and employees etc. in such a manner that the downtime of various inputs is adequately taken care of.
6. Economies of Inventories:
A bigger-size firm is In a better position to adjust its stocks of inputs and finished products etc. in such a manner that the normal discrepancy between flows of production and sales are ironed out.
6. Marketing Economies:
A large firm also reaps the advantages of buying and selling in bulk. As a result, it is able to procure its inputs at concessional prices. Similarly, on account of bulk selling, its average selling costs come down. It can also have separate sales and marketing departments, which can undertake the job of marketing its product in a professional manner. In addition, its sheer size imparts it better bargaining strength.
When a firm is not operating under conditions of perfect competition, it is obliged to undertake various activities to promote its sales of which advertising happens to be an integral part. It is found that a small firm is not able to afford advertising because it has to be repetitive to be successful. Moreover, with an increase in the advertising budget, a firm is able to diversify its programme so as to cover more effective media and in an optimum proportion. As a result, its per unit advertising expenses comedown.
8. Risk Economies:
A large firm can diversify its product lines and thereby reduce the average risk faced by it since all product lines are not likely to generate losses simultaneously. The firm can compensate its losses from some lines with profits from the others. A large firm has also better command over resources compared with a small firm.