External Dis economies (Its effect)

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External Dis economies (Its effect)

Due to external dis-economies, (if they are more powerful) will shift the LAC (Long run average cost curve) upward to LAC’. In this case the firm will be producing ‘OQ’ amount of quantity earlier at ‘ON’ cost, now due to external dis economies it will produce at ‘OR’ cost.

Limits to the Expansion of a Business

Although it is profitable to expand business yet it is not always possible to do so. The main obstacles in the growth of business are: (a) Financial, (b) Managerial, and (c) Market obstacles.


We take financial obstacles first. For expanding business. the entrepreneur needs fresh supplies of capital. It may not, however, be easy to arrange for more capital. Still the difficulty is not insurmountable. Successful businessmen. who have reputation for honesty and efficiency. will fi d ample capital forthcoming. Finance, it is ~ 1 a mere camp follower.

Advantage of Small Scale Production

ed t that the small manufacturer possesses er degree of maneuverability. He is capable of decision and quick execution. He can adopt  strategy as the market trends require. There is no divided responsibility. He is the only person concerned and he has none else to convince. The initiative and sense of responsibility of a small producer have not been sapped by routine. He does not need elaborate system of book-keeping and checks to prevent fraud or eliminate waste of lab our or material. As Marshall says, “the master’s eye is everywhere”. Close supervision makes for economic working

Personal contact with the employees, and a kind word thrown now and then. will rule out the possibility of a strike or any other trouble. Peace generally reigns in small concern and peace means prosperity. (h,) Personal contact w it the customers, again, sends them away satisfied and is productive of good results. Custom is stable and demand is steady. This means absence of n .


The small-scale producer cannot reap those economics which are available to a big concern. His drawbacks can be enumerated thus.(There is less scope for the use of modern machinery and labor-saving devices. Hence cost perunit is high.

(i) There is little scope for division of labor. The advantages of division of labour are, therefore, lost to him. Hence production is uneconomic.The small-scale producer is at a disadvantage in the purchase of raw materials and Luther accessories. This pushes up the cuts.

(ii) He cannot afford to spend large sums of money on research and experiments. Hence he cannot make innovations and thus reduce costs. (v) Cost of rent, interest, advertisement. etc., per unit of output is higher. That is, he has higher overhead charges. With his limited resources he cannot meet bad times. This means instability.  He cannot secure cheap credit. This means higher costs. By-products have to be thrown away as so much waste

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External Dis economies (Its effect)