Page 176 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-8: Production Function and Law of Production

8.17 Internal Economies Notes

When firm expands its scale of production, it qualifies for more economies. These economies are
called Internal Economies. The increasing returns of scale is due to internal economies. Internal
economies are those economies which are firm specific. These economies are received by those
firms who increase its scale of production and increase the production level. These economies are
called internal because the firms which do not increase its scale of production cannot qualify for
these economies.
According to Cairncross, “Internal economies are those which are open to a single factory or a single
firm independently of the action of other firms. They result from an increase in the scale of output
of a firm and cannot be achieved unless output increases.”
Types of Internal Economies—Koutsoyiannis has divided this into two parts—
(i) Real Economies and (ii) Pecuniary Economies

(i) Real Economies

Real economies are those which are associated with a What are Real Economies?
reduction in the physical quantity of inputs, raw materials,
various types of labour and various types of capital. Real economies are those economies
which reduce per units of production
costs.

8.18 Summary

• In the initial stage of production, the less use of variable inputs with respect to fixed inputs creates
the less use of fixed inputs, so if the maximum use of variable inputs creates the maximum use of
fixed inputs, then law of Increasing Returns of Scale applies. If increasing returns are operative
without limitations, the world could be fed from a kitchen garden or a flower pot simply by adding
enough labour and capital to the fixed land.

8.19 Keywords

• Production Function: Quantity of Production
• Short Period: Short Period
• Increasing Returns: Increasing Production
• Diminishing Returns: Diminishing Production

8.20 Review Questions

1. What do you mean by Production Function? Describe.
2. Give causes of Increasing Returns of Factors.
3. Give the details of three stages of production.
4. What do you mean by increasing returns to scale? Clarify it.

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