27B : Economies Of Scale (not Fin)

Question 1

Why do firms want to grow

Answer 1

Lower costs : the more items you make the cheaper it is to make the item

Survival : Some companies will not survive it they stay small (not competitive)

Question 2

What are internal economies of scale

Answer 2

The benefits to the company from increasing in size

Question 3

What are the types of internal economies of scale

Answer 3

• Technical economies :
- larger factories can be more efficient, output rises therefore average costs falls
- New machinery can do the work for a number of employees as well as more productive and better quality

• Financial economies :
- Larger companies have assets that they ca use as security to obtain cheap loans
- The larger amount borrowed usually the lower the interest repayment

Risk bearing economies :
Larger companies diversity into different markets to spread risk