During the increase in scales of production to a certain level an individual gets economies of scale. Beyond this increase there are diseconomies. There are two categories of economies of scale which are internal and external. Basically, internal economies of scale are the ones which are special to each company. Actually, as the company increases its production it enjoys internally. For instance, one company may enjoy good management while the other may have an advantage of good specialists. The existence of economies in production explains one of the reasons for the countries to trade. Actually, the economy of scale models explains why intra-industry trade exists. That is the trade between countries with the same characteristics as Canada and the United States (Smith & Enables, 2010, p. 1503).
In Internal economies, a factory usually opens to a single economy without the influence of another factory. This is as a result of scale output and it is not achievable unless the output is increased. Internal economies are divided into real and pecuniary economies. Real economies are related to the reduction of physical quantities of inputs, varied labor types, raw materials and capital among others (Krugman, 2012, p. 45).
Real economies are of various types. Technical economies influence firm size. In general, they accumulate to large firms which from the capital of goods and machinery enjoy higher effectiveness. Most applicable machinery is purchased by large scale producing companies with more resources. Consequently, companies with large-scale production take pleasure in economies by use of powerful techniques (Corden, 2009, p. 465).
There are three kinds used in technical economies of scale. The first one is the dimension economies. During an increase in economy of scale by a firm, average return increases, and average cost falls. The second one is linked process big company carries all activities that are productive which saves the cost of transport and time. The third one is economies of the use of by-products. Big firms use the waste-products and by-products to produce other materials which supplement their income.
Many selling or marketing economies are enjoyed when there is an increase in a firm’s scale of production. Appointment of sole distributors, showroom opening, and economies of an advertisement among others is included in marketing economies. A firm can do research to make the product quality more effective and minimize production cost. Advertising economies are the other types of economies from arrangements which are special from dealers who are exclusive. All these undertakings result in large-scale production (Caballero & Lyons, 2015, p. 807).
Expansion of production scale results in the accrual of labor economies which include new inventions, time-saving production among many others. There is the employment of a large number of workers by big firms where each employee is given the job that fits him or her. There is an evaluation of the effectiveness of working labor by an officer where possible. Employees have skills in their operation are this helps to save time and production at the same time encourages new ideas (Bruni, 2010, p. 178).
The fourth internal economies are managerial economies. It refers to the cost of management and good management of big firms in relation to production. There is a subdivision to various departments which are lead by a specialist who keeps details of his department. A small firm cannot afford this kind of expertise. Under expert supervision, the cost of production is minimized. Mechanization and specialization of management functions lead to a reduction in the cost of production.
The fifth real economies of scale are transport and storage. A farm that has large-scale production enjoys transport and storage economies. A big farm uses its own transport means to transport finished well from one place to another. Additionally, they enjoy economies of big storage and go down facilities. This implies that when prices in the market are unfavorable, they can store their products (Harris, 2010, p. 1018).
The second type of internal economies of scale is pecuniary economies. They are those that can be experienced after payments of lower prices of production process factors and distribution. Because big farms buy raw materials in large quantities, they can purchase them at low prices. Consequently, they enjoy bank borrowing and advertisement concessions (Saunders & Thomas, 2016, p.45).
These economies occur in big companies in the following ways; firstly, the company purchases raw materials in large quantities, this makes them get reduced prices from the supplier and this is a monetary gain to the company. Secondly, the firms that do mass production of goods and products are given loans at interest rates that are low and other favorable terms from the banking sector. Thirdly, the big firms are given better transport facility means because of their large-scale transportation capabilities. Fourthly, big companies are given facilities to advertise at lower costs by advertising firms and newspapers (Chapman, 2013, p. 348).
They are the benefits accrued by all the companies working in a given industrial field. In general, these economies are realized due to the expansion of industries and other government expanded facilities. To be precise, external economies of scale are collective benefits enjoyed by firms or industries when there is an expansion of economies of scale. The easiest instance of external economies is experienced when the scale of production has an implicit variable of the industrial output. For example coal mining in the locality (Christensen & Greene, 2014, p.656).
Concentration economies
External economies of scale are divided into; concentration economies. The increase in a number of firms in a certain area makes firms to enjoy transport and communication, availability of raw materials, research and innovation benefits among other benefits. Also, they get financial assistance from banks and other non- banks. From this observation, it can be concluded that concentration leads to economies of scale.
Economies of Information
Secondly, there are economies of information. There is the mutual dependence of a number of firms when they expand. More precisely, it can be argued that they do not feel the need for research on an individual basis. They all use information from published trade j and scientific journals which informs them on new markets, the source of materials, latest techniques among others (Young, 2010, p. 235).
Disintegration economies
The third external economies of scale are disintegration economies. During the growth of an industry, it may decide to divide and sub-divide its production process. As a result of sub-division, each firm specializes in its own process. For instance, in a moped industry, some firms specialize in rims; hubs while others in pedals, chains among many others.
There are two types of disintegration, in horizontal and vertical disintegration. In horizontal disintegration, each company in the industry specializes with one area of expertise while vertical disintegration every firm works to specialize in the different field of expertise. Other firm’s raw material might be availed for use by another firm. Therefore, waste products are converted into by-products.
The cost minimization is achieved through selling firms through the use of their wastes products. The firms that buy get other firm’s waste product at cheaper prices. This results to decline in the average cost of production. Economies of scale are important in determining the industry nature i.e. increasing, decreasing or constant industry cost. A firm experiences external economies and diseconomies of scale when it expands in response to increased demand for its product. An external economy minimizes production cost through shifting curve upwardly and results to long period average cost curve. On the other hand, there is an increase in cost due to diseconomies resulting in an upward shift of long period average cost curve. In a case whereby the external diseconomy outweighs the external economies, net external diseconomies. In such a case the industry will be an increasing cost industry (Henderson, 2011, p. 60).
Economies of scale impact the international trade through improving production efficiency in the world and benefits for the welfare that are realized across all the countries that trade. The trade among the countries does not depend on the differences under economies of scale assumptions. Actually, it is acceptable that there might be the identity of countries in all dimensions and still find it of benefit to trade (Caballero & Lyons, 2014, p. 806).
Trade among countries is better explained through economies of scale models for example trade between the United States and Japan. There are similarities of technology in most parts of this countries and also endowment and to some extent similar preferences (Gilmour, 2009, p.23). By use of a simple classical model of trade these countries would have little or no reason to participate in trade despite the fact that trade between developed countries makes up the very important share of trade in the world. Therefore there is the provision of the solution by economies of scale to this type of trade.
Intra-industry trade is another aspect of the economies of scale that has remained unexplained. In average, same goods are imported and exported by countries. For instance, United States of America imports and exports automobiles. Aggregation of products into one category leads to intra-industry trade. For example, varied steel types are produced from flat-rolled to specialty steels. This could be due to the fact that some type of steel needs a specific technology which the country has a comparative advantage in it. Also, another country may possess a comparative advantage in another steel type. However because both types of steel are aggregated in import/export category, it could look as if there is importation and exportation of ‘identical’ products when actually they are importing one type of steel and importing another type (Alt?nk?l?ç & Hansen, 2009, p. 194).
However, an intra-industry trade that is inclusive of products that are differentiated even when differences in technology and resources do not exist. This type of model is commonly referred to as the monopolistic competition model. It majorly concentrates on the consumer demand for varied characteristics captured in the good that is sold in the product category. Differentiated products are advantageous even when countries are the same in production capacities.
Economies of scale increase the number of the product’s variety for the consumer to opt from. Also, they reduce the price of each variety in sell in the market. Also in the international trade, economies of scale raise the supply of the products in other markets and results in lowering of prices for those products.
Also, economies of scale generate trade gains in international trade due to the reallocation of resources which increases world efficiency in productivity. To better explain how trade gains can be achieved through a model similar to the Recardian model is used.
It is worthy to note that reallocation in all firms in a way that world production effectiveness arises. Actually, if the two goods increase then, the terms of trade are made easy to be found. Some aspects of economies of scale models make them appear quite unique from other trade models. For instance, it is quite possible to illustrate that identical countries in every aspect might be of advantage to trade. Therefore, the countries’ difference does not initiate a trade. In this case, therefore, it is the aspect of the process of production that makes the trade gains to work (Lancaster, 2010, p. 185).
Secondly, the scale of economies cannot be forecast l which country exports which well. There is possibility of gaining in international trade provided the trade between countries takes place. Additionally, it may not matter whether one’s country produces economies or not because both countries will experience the anomies provided the right trade terms are put in place (Mundell, 2011, p. 326).
Regardless of the differences with other models, the major similarity is that the trade gains come because of productive efficiency improvement. Through resource reallocation between countries, it has been made possible to have more output production with the same amount of resources. This has remained the major motivation in support of international trade (Fujita, Krugman & Venables, 2014, p.200).
The economy of scale explains usefulness in the motivation of intra-industry trade. These are trades that exist between countries within an industry rather than across the industries. Actually, in simple terms, these models explain why countries import and export automobiles at the same time. This type of trade is frequently measured but it is not explained in the Recardian or Heckcher-Ohlin model of trade. In those countries, they might export wine and import cheese but would not import wine at the same time (Helpman, 2015, p. 307).
The model does not demonstrate that intra industry trade arises, but also national welfare can be improved due to international trade. Individual companies produce large quantities which uplift individual welfare. Due to economies of scale production, unit-production costs are reduced. The economies of scale lead to welfare improvement in international trade because consumers are able to choose out of the great varieties of products that are available as compared autarky (Krugman, 2014, p.185).
International trade is where many countries are involved in trading. Due to the competitive nature of the trade, the firms need to be smart enough in its production so that it reaps enough. The companies that are willing and able to implement prudent and realistic economic strategies survive the competition. The world’s economy and production efficiency of individuals is improved as a result of the high competition of different firms in the international trade. In international trade firms major most in production of products that they posses comparative advantage (Krugman, 2014, p. 180).
Communication services in the international market. America even sources call centers from India. The Indian call centers are not better than those of the United States and even their workers are not fluent in speaking English but due to the fact that they offer their services cheaply, this has made the United States and other nations to source their services International trade has helped the companies to enjoy economy specialization and integration of economies of scale (Chipman, 2013, p.347). As mentioned earlier, international trade is much competitive and a firm can only gain if it has the best comparative advantage in producing the products it sells. A good illustration of the comparative advantage that countries which have petroleum production in chemical production therefore Countries in the United States have comparative advantage in production of chemicals. These countries are inclusive of Kuwait, Mexico and Saudi Arabia whereby they have become very competitive in the international trade in terms of chemical production making the United States to remain dominative in chemical market. India has comparative advantage in offering communication services. It exports almost all the
International trade has impacted the firms participating in it with economies of concentration. The concentration of firms from various countries to carry out international trade has led to the development of financial institutions to avail funds to these firms in terms of loans for their expansion (Ethier, 2016, p. 390). Examples are the World Bank and the International Monetary Fund. As firms from various countries trade, foreign exchange has come in to help in currency exchange so that they can successfully trade together.
Highly skilled labor force is accessible through international trade. This implies that as people from different countries trade, they interact and exchange skills and knowledge. Some have the intention of securing jobs in some of the international firms in the international trade. Actually many people from developing countries secure employment from developed countries as they trade. Therefore, due to reduction of employment costs, countries enjoy economies due to availability of skilled labor.
The information circulation and flow has also been enhancing by international trade among countries that trade together. As firms trade, they interact with one another and get information about current issues in the market and adjust accordingly. International trade journals are also published for the international trade partners to get information circulating in the market.
Conclusion
In conclusion, trade is free if scales of economies are attained in production when good labor reallocation is done; there is an improvement of the national welfare of the two countries relative to autarky. The improvement of welfare comes about because the concentration of production in economies of scale industry of one country. Therefore advantages can be taken of productivity improvements.
Therefore countries that achieve economies enjoy some benefits. There is also a limit for large-scale production. For instance, when the firm size increases beyond a certain limit the firm is most likely to get diseconomies of scale in place of economies. Due to this reason, the firm must work to maximize economies and minimize diseconomies to sustain its business for a longer time.
References
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