THEORY OF PRODUCTION

Scale of production refers to the level at which a business operates, and it brings both advantages and disadvantages. Internal economies of scale happen within a single firm when production increases, reducing average costs. For example, when Dangote Cement expands its factory, it can buy raw materials in bulk at cheaper prices and use machinery more efficiently, lowering the cost per bag of cement.

External economies of scale occur outside the firm when an entire industry grows in a location. When many textile factories cluster in Kano, they share better transportation networks, skilled workers, and suppliers, benefiting all businesses there.

Understanding these economies helps explain why larger firms often dominate industries and why certain regions become production hubs in Nigeria. As production grows, whether internally or externally, efficiency improves and costs decrease.

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When many firms in the same industry locate together, they share common benefits that reduce individual production costs. This is called external economies of scale. For example, in Lagos's Shoemaking Village in Mushin, numerous shoe manufacturers benefit from shared skilled workers, nearby leather suppliers, specialized repair services, and established distribution networks. Each factory pays less for materials and labor because suppliers have concentrated there too. None of these advantages came from within the individual firms—they came from the industry clustering together. This reduces everyone's average costs of production simultaneously.

External diseconomies happen oppositely when congestion, competition for resources, and rising land prices increase costs for all firms in an overcrowded location.

Understanding this concept helps explain why industries cluster geographically across Nigeria, from textiles in Kano to oil services in Port Harcourt.

Variable proportions means changing the amount of inputs used while keeping others fixed. Imagine a cassava farmer with a fixed plot of land. He can increase production by hiring more workers to plant, weed, and harvest. As he adds more labour to the same land, output grows—this is variable proportions at work.

The law of variable proportions explains what happens: initially, extra workers boost production greatly (increasing returns). Eventually, adding more workers to limited land causes problems—they get in each other's way and production increases slowly (diminishing returns). Finally, too many workers actually reduce total output (negative returns).

Understanding this helps explain why businesses don't just keep hiring endlessly. There's always an optimal combination of inputs for maximum profit.