Economies Of Scale

Question 1

Define economies of scale

Answer 1

When the ACs per unit of output decrease with the increase in scale of the output being produced by a firm in the long run

Question 2

Explain technical economies of scale

Answer 2

Increased dimensions (container principle), indivisibility of capital, where large firms able to buy equipment that wouldn’t be economical for small firms to purchase (as it would lie idle for most of time)

Question 3

Explain managerial economies of scale

Answer 3

When larger firms can afford to hire staff specialising in certain areas who are likely to be more efficient, thus lowering costs

Question 4

Explain commercial economies of scale

Answer 4

Bulk buying, larger firms can buy larger quantities from suppliers and will get better deals

Question 5

Explain financial economies of scale

Answer 5

Larger companies can borrow more money and at lower rates of interest, lower risk as they have more collateral and more sources of finance

Question 6

Explain marketing economies of scale

Answer 6

For larger firms, the cost of advertising is spread over a larger number of potential customers

Question 7

Explain external economies of scale

Answer 7

Occurs when industry size grows in a specific location and e.g. fast broadband / new transport links make it cheaper for firms to be there