Limitations To The Scale of Production or To The Growth of Firms.

LIMITATIONS

There are some limitations affecting the growth of firms or the scale of production. Some of which are:

1. Extent of the market: When there is a high demand for certain products of a firm, this will motivate the firm to produce more goods so as to expand.
   
   
2. Availability of capital: The availability of adequate capital and other resources will enable a firm to expand and produce more goods but when these resources are no more available, growth and expansion will be impossible.
   
   
3. Falling price of the commodity: A falling price of the commodity without corresponding increase in supply definitely tends to lower the scale of production.
   
   
4. Increased risks: It is generally known that the bigger a firm, the greater the level of risks and vice versa. In order to reduce the level of risks, the size of the firm has to be reduced.
   
   
5. Nature of Business: The nature of business is directly related to the scale of production. When a large number of people demand for a particular commodity, it will require a large firm to handle it but when a personal service of a barber for example is required, the size of the firm has to be small.
   
   
6. Need to cater for individual taste: Large firms are known and associated with standardization of products which does not meet the taste of individual. To meet this taste, there will be limitations in the scale of production.
   
   
7. Nature of the firm's products: If a firm's products are of inferior and perishable type, their size and growth are definitely going to be limited.
   
   
8. Increasing management costs: When a firm embarks on large scale expansion, there is a corresponding employment of managers and this tends to increase the cost of production of such firms.

EXTERNAL ECONOMIES AND EXTERNAL DISECONOMIES

External economies are the benefits a firm derives from concentration or localisation of industries in a particular area. In other words, these are the benefits a firm enjoys from increase in its output and decrease in cost as a result of the kind of assistance it derives from other firms within the same location. External economies are mostly derived from industrial estates where there are many firms operating in the same location.

External dis-economies, on the other hand, means the advantages a firm experiences when the activities of one or more industries increase the cost of production or output of that firm within the same location.

The advantages and disadvantages of localization of industries are also applicable to external economies and dis-economies.

You can also read the following related topics:
1.Labor as a factor of production
2.Capital as a factor of production
3.Entrepreneur as a factor of production
4.Land as a of production