COM4: ECONOMICS OF SCALE

This unit combines topics like Economics of scale, cooperatives among others.

ECONOMIES OF SCALE

Economics of scale are advantages of large scale production enjoyed by a firm resulting from reduced costs of operation as it expands. The average costs reduce as the firm expands.

Advantages of large scale operation

  • Administration

The administration of a firm remains constant even when it expands and doubles its operation.

  • Specialization

Large scale operations leads to specific people being employed at specific levels of production. The use of machines is made possible. This results in many advantages as seen earlier.

  • Research

Large scale firms are in position to establish their own research centers. This improves the quality and lowers the operational cost small scale firms may not be able to achievements.

  • Staff welfare

Large scale firms are in position to offer services such as; health, accommodations, lunch recreations etc to their workers. This stimulates and motivates them to work therefore better results.

  • Advertising

Large scale firms can afford and are in position to advertise. This not only creates new market but maintains sales.

  • Use of modern equipment

Large scale firms have sufficient capital to obtain modern equipment. This ensures efficient, cheap and faster rate of production. A firm with tractors and combine harvest has an advantage over the one with an ordinary pang and hoe in production.

  • Marketing economics

Large scale firms buy and sell in large quantities. Purchase of raw materials in large quantities at a discount lead to cheap procurement.

  • Finance economics

Large scale firms have sufficient security to enable them obtain loans from banks and financial institutions.

  • Risk bearing economics

Large scale firms have the capacity to take on risks. This is typical of entrepreneurship since greater risk, the larger the profit margin.

Marketing boards are trading organizations either set up by the government or private sector with the sole purpose of encouraging and controlling the marketing and agricultural produce.

Functions of marketing boards performed to farmers

  • Buying the produce

They buy produce from farmers at a reasonable price fixed by the government. They either buy directly from farmers or through the comparative societies or agents eg coffee marketing board.

  • Selling produce

They sell the produce to either the local consumers, processors or to foreign consumers at best prices possible.

  • Carry out the processing

They carry out the processing of the produce to obtain recommendable grades which ensures high price eg coffee.

  • Control of produce

Boards set may set up advisory boards to offer relevant advice to ensure good quality of produce and the right amount to be produced. Over production or under production will lead to instability in price which is a big problem. This can be done by fixing quotas or operating licences to producers.

  • Collection of produce

The boards collect produce from the co-operative society stores of directly from the farmers ‘shambas’. This way they are able to check on the quality of the produce before buying it.

  • Transportation of produce

They provide transport facilities to the farmers by transporting the produce from co-operative stores or the farmer’s shambas to the market or sometimes to the consumers both at home and abroad.

  • Storage facilities

The board provides ware houses where surplus goods can be stored awaiting transportation to the market or waiting to be released when demanding by consumers and processors especially for seasonal produce like maize, beans, soya etc.

  • Stabilization of prices

Marketing boards stabilize the price of agricultural produce through storing the surplus and releasing it only when it is required by consumers and processors. This can be done thru regulation and control of output by producers.

  • Research services

Marketing boards undertake the research in agriculture aimed at improving agricultural production methods and quality of goods produce. Their research findings are passed over to local farmers through newspapers, magazines, radio, and extension services tv etc.

  • Specialized service

Marketing boards offer specialized services to local farmers which they could not afford on their own eg spraying of crops to control pests, processing of produce and providing packing materials eg bags etc.

  • Financial services

Marketing boards pay farmers promptly hence farmers do not have to wait until their produce is sold to the final consumers. They also offer grants loans, crop finance to farmers to enable them purchase quality seeds, fertilizers, insecticides, farm equipment.

  • Marketing boards advise government on fixing the price of the produce eg coffee, cotton and maize etc.

Problems marketing boards encounter in marketing agriculture produce

  • Price fixing

They often fix prices to buy the produce at the beginning of the growing season. This may turn out to be above or below the real or the world market price therefore leading to price instability and financial losses. It is a discouraging factor to farmers.

  • Political aspects

They are usually linked with the government which influences them in many aspects. This implies that the boards are not free to make their own independent decisions. Management is determined by the government in power where changes in regime make it difficult to effect and co-ordinate policies of the board efficiently.

  • Surpluses of over production

They face the problem of over production especially coffee where surplus is either wasted or sold at low prices. This leads to financial losses discouraging the farmers.

  • Smuggling

They face the problem of block marketing, smuggling and official marketing in neighboring countries where price may be higher than those offered by marketing boards at home. At times the currency abroad may be stronger than that at home.

  • Corruption and mismanagement

Given the fact that the management is appointed by the government, there are problems of inefficiency, dishonesty, corruption, misappropriation of funds, nepotism and embezzlement etc. this causes artificial shortages of funds discouraging farmers sometimes, the payments made late or in installments which is very irritating.

  • Organizational problems

Their operations are wide spread geographically leading to complex administrative difficulties. Co-ordination turns out to be difficult and inefficient

  • Transport

Most feeder roads are seasonal murram roads which cannot stand bad weather conditions. This creates a problem of collection and marketing vehicles break down during heavy rains. The quality of the product may be affected in the process.

  • Poor quality produce

Due to poor methods of handling and processing, poor quality produce is experienced. The drying may be on bear ground for coffee, beans, maize, leading to a substandard quality. This leads to low prices fetched and unfavorable competitive capacity on the world market.

  • Commodity marketing boards

These are boards whose activities are specialized in the purchase and sale of one commodity eg coffee marketing board, lint marketing board, maize marketing board (kenya) etc.

  • Produce marketing board

They are those which handle a variety of agriculture products. They deal in arrange of products like maize ground nuts, cimsim, soya beans, beans etc for example produce marketing board in Uganda.

  • Export marketing boards

They are those which concentrate on the marketing of variety of agricultural products to foreign market eg Coffee Marketing Board which sells coffee to international coffee organization.

NB – Coffee Marketing Board can be both a commodity and export marketing board.

CO-OPERATIVES

A co-operative is a voluntary organization set up by people having a common interests and goal to share the responsibility and carry out such activities. The group could be of consumers, producers on credit and savings members. The management and control is shared by members equally. Profits are shared depending on the member’s transaction with the co-operative in a given period.

Aim of co-operatives

  • To avoid exploitation of members by business men
  • To improve on the living conditions of members by offering essential services fair prices
  • To earn revenue for the members by distributing surplus profits
  • To acquire a combined membership contribution to carry out business and have a strong bargaining power for their services
  • To mobilize savings among members and provide loans to members at fair interest rates.

Principles of co-operatives

  • Open membership

Anyone is free to join and withdraw from a co-operative society at his own will. Membership is therefore open to all irrespective of their origin; region, creed, sex, political affiliation etc provided one has contractual capacity.

  • Democratic control

The management of a co-operative society is based on the principle of ‘one man one vote’. Each member regardless of their financial position is legible to one vote and election to any office.

  • Interest of capital

The society pays a fixed rate to interest according to capital contribution by members such interest is paid annually regardless of the financial position of the society ie whether it has made profits or not.

  • Payment of dividends

Where the society has made profits such profits are distributed to members in form of dividends. Such profits are shared in relation to the members participation in the society business ie the greater the volume of sales or purchase to form the society respectively, the greater the members. Share of profits.

  • Co-operation with other co-operation

There is co-operation among all co-operative societies at local and international levels. This is promotion of the co-operative movement throughout the world. It therefore involves following stages of co-operation at grass root level (primary) district, country and international level.

  • Prices to the members

All sales and purchase to and from the society are made at the prevailing market prices for can only. This is to prevent exploitation of the members by business men and to provide services to members at fair prices.

  • Share capital

Each member must contribute a minimum share capital. A member is entitled to a number of shares up to the upper limit specified. Any mentees has the freedom to with draw his shares if he so wishes.

  • Neutrality in social economic and political difference

To improve the inner unity of the co-operative societies, they are supposed to be and remain neutral from all social differences eg religious, political or racial.

Role played by the co-operative movement in Uganda

  • They undertake the marketing of agricultural products which are the major foreign exchange earners eg cotton, coffee, tea, beans and maize.
  • They offer training of farmer’s though co-operative college demonstration centre eg the district farm institute etc to equip them with the relevant knowledge to promote co-operative activities.
  • They provide essential services to farmers which they would not afford eg high quality seeds, pesticides, farm equipment, packing materials etc.
  • They under take research into better methods of agriculture and to improve quality of seeds. The results and findings are sent to farmers through the new media, the press, extension service etc.
  • They provide transport facilities to transport the farmers produce to the market reducing the marketing costs of the farmers.
  • Co-operatives provide storage services for the farmers’ produce to improve on their earning. They run cotton ginneries, coffee processing machines etc which are paramount help to the farmers.
  • They help to mobilize savings and offer loans and credit facilities to the members to finance their seeds, construction of land, farm inputs and equipments, quality seeds, construction of houses etc.
  • They also help to raise the standards of living of the members by offering them essential consumer goods.

Problems encountered by co-operatives

  • Co-operatives don’t provide arrange of services because they tend to concentrate on a few goods and services eg marketing of coffee, cotton or tea.
  • They face the problem of insufficient funds esp where they depend on members contribution where income are relatively low. This makes it difficult to meet their commitment and the needs of the societies.
  • The societies face serious competition from private business enterprises which can provide better services than co-operatives.
  • There is lack of trust among members towards the societies ie some members may prefer selling and buying goods to or from private enterprises rather than their societies. This reduces the society’s effectiveness.
  • They suffer from inefficient management which lacks relevant education and experience. Some of them their appointment is based on the length of service than on the ability competence, efficiency and qualification of an individual.
  • They also suffer from corrupt and dishonest officials who may want to use the co-operative society to achieve their own interest hence misappropriation of business funds and property.
  • There is lack of security for loans among members and this has resulted into bad debts to the societies where loans and credit facilities have been extended to members who later fail to pay the loan.
  • The co-operatives also lack adequate storage facilities to store their members produce. This may lead to losses during bad weather that will lead to related problems like and thefts.
  • They face a serious problem of over production. They end up fetching low prices and produce is wasted. Price fluctuations on the world market for agricultural. It is difficult for them to carry out their activities and pay.
  • In Uganda, farmers are scattered all other the place. This makes decision making difficult leave alone implementation of the same.
  • Consumer and even producer co-operative societies may not succeed where agriculture is in the hands of large scale estates and plantations farmers. This renders them insignificant.

By stating the aims and objectives distinguish between the consumer and producer co-operative societies.

Consumer co-operative societies are retail businesses owned and operated by a group of consumers to purchase and distribute consumer co-operative society, Lugazi factory consumer co-operative society etc.

Aims (they can serve as advantages)

  • To provide consumer goods to the members at fair prices
  • To protect the members against poor quality goods and dangerous goods sold by private traders.
  • To protect members against exploitation by dishonest traders who aim at profit maximization.
  • To avoid excessive profits enjoyed by the private traders and pass it over to the members in form of dividends.
  • To offer advice to members about the advantages and disadvantages of certain unusual and uncommon goods and the dangers surrounding such goods
  • To encourage co-operation among members and bring services to rural areas where independent traders cannot operate.

PRODUCE CO-OPERATIVE SOCIETIES

To encourage saving by accepting contributions from members producer co-operatives societies which are owned and operated by a group of producers to collect, transport, process and marker the members’ produce. In Uganda, they undertake the marketing of agricultural products like cotton, coffee, tea; tobacco etc. examples include Bugisu Co-operative Union, Banyankole kweterana co-operative union.

Aims

  • To obtain better prices for the members’ produce
  • To acquire a strong bargaining position through collective efforts
  • To offer essential services to members such as transport, processing marketing etc
  • To advise members about better methods of production and to offer inputs eg quality seeds, fertilizers etc
  • To secure loans and credits for the member of reasonable terms
  • To stabilize the prices of agricultural produce to enable the members to plan for the income

Advantages of savings and credit co-operative societies

It is a form of co-operative society which undertakes to encourage and mobilize savings from members and extend credit facilities to them in form of loans at fair items. Members can acquire loans to purchase capital goods eg agricultural machinery construction of house, purchase of land etc. an example is the Mengo teachers’ co-operative credit and saving societies limited.

Advantages

  • To encourage law income earners to save money
  • It gives interest to members for the capital contributions made
  • It lends money to members to invest in profits generating venture.

Differences between co-operatives and joint stores companies

  1. While co-operatives are registered under co-operative societies Act, companies are registered under the companies Acts.
  2. A minimum of ten members is required to form a primary co-operative society while private limited company requires a minimum of two and a maximum of fifty. Public Limited Companies requires a minimum of seven and a maximum of infinity.
  • There is an open membership for co-operatives societies while for companies one has to apply through the Board of directors.
  1. For societies owners are as well as the customers and supplies while for companies their goods and services are offered to the general public and not to share holders.
  2. Societies are run on the principle of ‘one man one voice’ where as voting in companies depends on the number of shares held by a member each share equals to a vote.
  3. The share capital of a society has to upper limit. Many shares are possible and can be issued out. the company’s shares are limited to the amount of the authorized capital
  • Societies have only one type of share capital with a fixed rate of shares and preferences shares having varying rates of interest.
  • The control of societies on a democratic basis while companies are controlled by its directors.

ASSIGNMENT : ECONOMICS OF SCALE ASSIGNMENT MARKS : 10  DURATION : 1 week, 3 days

SEE ALLAdd a note
YOU
Add your Comment
 

DOWNLOAD YAAKA DN APP









X