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Optimum Size

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Published in: Economics
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Topic of this sample note is Optimum Size.

Nehal A / Delhi

1 year of teaching experience

Qualification: M.A (Amity University, Uttar Pradesh - 2015), B.B.A (Maharshi Dayanand University , Rohtak - 2013)

Teaches: Economics

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  1. OPTIMUM SIZE The concept of optimum size of the firm is attributed to E.A.G. Robinson (the structure of competitive industry). By optimum firm Robinson means —"a firm operating at that scale at which in existing conditions of technique and organizing ability, it has the lowest average cost of production per unit, when all those costs which must be covered in long run are included. Robinson further states that the optimum firm is likely to result where market is perfect and sufficient to maintain large number of firms of optimum size. The concept can be illustrated with the help of diagram.. FACTORS DETERMINING OPTIMUM SIZE 1. Technical factors:-These usually tend to increase the size of the firm. The technical economies operate mainly through (i) division of labour and (ii) integration of processes Greater specialization leads to the development of specialized machinery to perform the different tasks into which the manufacture has been divided. The gains from integrated process arise from the unification of a number of processes hither to perform in series, so that they might be performed simultaneously. 2. 3. 4. 5. 6. Managerial factors: - here also economies flow from specialization and integration. A large firm can divide the functions of management into many parts and employ a specialized and best fitted man for it. Financial forces: - A large firm has certain advantages in the field of finance. o In raising long term capital a large public issue is relatively cheaper. o Able to obtain loans at comparatively cheaper rates o Greater possibility of making one part of business temporarily financed by another o Requires smaller reserves to cover contingencies o Easier to raise loans from financial institutions Marketing forces: - A large firm can appoint specialist for purchasing and it is in a better bargaining position. Sales force can be made productive and R&D can be effectively carried. Forces of risk and fluctuations: - Four types of variations are generally observed-permanent change, cyclical variations of demand, seasonal variations and erratic variations. External economies: - It refers to factors common to all firms like better transport facilities or other subsidiary activities. One industry in growing promotes the growth of others and the optimum size of firm in each industry is increased. 1

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