Internal Economies are those economies – or those reductions in the cost of production – which arise in the firm itself as the scale of its production increases. These economies lead to increasing returns and a fall in the discussed under the following headings:
Labour Economies. With expansion in the scale of production more of labour is likely to be employed. A large number of people, working in a factory would afford a greater possibility of introducing more and more complex division of labour. Specialization and division of labour lead to an increase in skill and dexterity of the workers, avoid wastage of time involved in shift from one part of the job to another, and offer to every worker a job of his liking, choice and capability. Thus, the cost of production is likely to fall when with the expansion in the size of business, the degree of division of labour increases.
Technical Economies. Technical economies arise with the expansion in the size of business because in the long – run firms are in a position to employ larger, better and right type of plant and machinery. Similarly and specialized personnel in their administrative, production and sales departments.
Managerial Economies. The cost per unit of management also falls as the scale of operations increases. In a small – scale business a manager will not be able to give his best because he has capabilities only partially. But as the scale of operations increases, he can undertake elaborate management and select competent people to help him in various departments. All this would raise the profits of the business to a high level, by reducing the cost of production.