Concept of Optimum firm / various factors which determine the optimum firm
Optimum Size of Business
The scale of operations of any business units has a tendency to expand so as to device the economies of large scale production. But there is limit beyond which further expansions is not worthwhile and becomes unprofitable. The scale of operation at that point, from the stand point of costs and profits, becomes better and economical than any other size or scale of operation. Thus, the size or the scale of operation which ensures minimum cost and yields maximum profits is technically termed as ‘Optimum Size’ and a firm with such a size is known as ‘Optimum Firm’
According to E. A. G. Robinson, “By Optimum Firm, we mean that firm which has the lowest average cost of production per unit. It is the best firm with exactly the right size, neither too large, nor too small. This is the limit beyond which further expansions of business is not worth while and becomes less profitable. The scale of operation of a business beyond this optimum limit is considered as too big”. Thus the optimum firm is that organization of business enterprise which in given circumstances of technology and the market for its product can produce its good at the lowest average unit costs in the long run.,
If the concept of the optimum firm is represented on a graph, it will be as follows:
The size measured along the X-axis and average cost per unit along the Y-axis The cost per unit falls as output increases until at point P it begins to rise again. This point indicates the optimum size.
Factors Affecting Optimum Size
The size or the scale of operation which ensures minimum cost and yields maximum profits is the technically referred to as the “optimum size of the business unit”. The factors which determine the optimum size of a business unit as given by Robinson are discussed below.
1. Technical Factors: The technical factors refers to such factors as the degree of specialization (or division of labour), mechanization, automation, integration of work processess, etc. These factors are such that without the minimum scale of operation, the firm may not be able to derive their full benefits. Hence, these factors which, taken together, determine the “Optimum Technical Unit’ of operation, provide a minimum size of the unit. Beyond this optimum level further economies are not possible without expansion.
2. Managerial Factors: Size of the managerial optimum too is the result of division of labour, specialization and standardization in the management process. It should, however, be noted that beyond the certain limit, extension of managerial functions under the existing conditions of specialization and integration results in diseconomies. Thus, it sets the upper limit of the firm from the point of view of management.
3. Financial Factors: The methods of procuring the industrial finance also influence the size of an enterprise in the three different ways, viz., (i) cost of capital procurement (ii) terms of securing capital, and (iii) the amount of capital that could be raised. Ordinarily the bigger the size, the more convenient it would be to procure the necessary amount of capital on easy terms. Industrial units of fairly big-size find if easier to raise working capital from the banks because size gives an idea of soundness, solidity and security. Further, the government is always interested in protecting the interest of shareholders of big concerns. lest it might adversely affect the pace of industrialization. Government can put pressure on financial assistance on favourable terms.
4. Marketing Factors: Marketing factors like the scope of large-scale buying and selling imply that while with large size a firm may derive the economies of large-scale buying, selling and transportation. It is also true that lapses in buying and selling cannot be easily made good with large scale operation. When a business continues to grow in size it is required to spend increasingly heavy sums of money upon sales organization. Consequently, marketing of goods may become more expensive to the business. A stage of expansion may be reached where the extra cost of marketing may not be justified by the extra economy to be obtained from operations on a large scale. Thus, the limit to expansion on this count determines the Optimum Marketing Unit of operation.
5. Risk or survival factors: While planning the size of industrial unit. the entrepreneur has to take into account changes in demand, which introduces an element of uncertainly and risks. The risk and uncertainties which accompany business activities in a competitive world constitute another major force which restricts the expansion of a firm beyond a certain point and specify what is known as the ‘Optimum Survival Unit’ of Operation.
