Internal Economies that accrue to a particular firm with the expansion of its output and scale are termed is internal economies. Internal economies of a firm are independent of the action of other firms. They are internal in the sense that they are limited to a firm when its output increase. They are not shared by other firms in the industry. Following are the main types of internal economies:
1. Labour Economies
Division of labour and specialization are possible more in large-scale operations. Different types of workers can specialize and do the job for which they are more suited. A worker acquires greater skill by devoting his attention to a particular job. As a result of this quality and speed of work both improve.
2. Technical Economies
The main technical economies result from the indivisibilities. Several capital goods, because of the strength and weight required, will work only if they are of a certain minimum size. There is a general principle that as the size of a capital good is increased, its total output capacity increases far more rapidly than the cost of making it.
3. Marketing Economies
Marketing economies arise from the large scale purchase of raw materials and other inputs. A firm may receive large discounts on the purchase of bigger volume of raw materials and intermediate goods. Marketing economies can also be reaped by the firm in its sales promotion activities. Advertising space (in newspapers and magazines) and time (on television and radio), and the number of salesmen do not have to rise proportionately with the sales. Thus per unit selling cost may also fall with the increase in output.
4. Managerial Economies
Managerial economies arise from specialization of management and mechanisation of managerial functions. Large firms make possible the division of managerial tasks. This division of decision—making in large firms has been found very effective in the increase of the efficiency of management.
5. Financial Economies
Large firms can easily raise timely and cheap finance from banks and other financial institutions and also from the general public by issue of shares and debentures.
6. Risk-bearing Economies
A large firm can more successfully withstand the risks of business. With the product diversification and by operating in several markets a large firm can withstand the risk of changing consumer’s tastes and preferences.
7. Economies Related to Transport and Storage Costs
Large firms are able to enjoy freight concessions from railways and road transport. Because a large firm uses its own transport means and large vehicles, the per unit transport costs would fall. Similarly, a large firm can also have its own storge godowns and can save storage costs.
8. Other Economies
A large firm may also enjoy some other economies with the expansion of its output. Prominent among them are economies on conducting research and development activities and economies of employee welfare schemes.
As a result of all these internal economies firm’s long-run average and marginal cost decline with the increase in output and scale of production.