Internal Economies Of Scale

Question 1

Internal economics of scale

Answer 1

Larger firms can benefit from lower average costs, which improves their ability to compete in their market place

Question 2

External economies of scale

Answer 2

Larger firms can benefit from lower average costs too, but these benefits should also be available to competitors that operate within the same industry.

Question 3

Expensive capital equipment (technical economies of scale)

Answer 3

This leads to more efficient production, thus reducing AC, and increases quality, which should lead to an increase in demand

Question 4

Economies of increased dimension (technical economies of scale)

Answer 4

Larger firms can use large scale equipment more effectively e.g doubling the size of containers and warehouses/factories will not lead to exact doubles costs- so AC falls

Question 5

Specialisation and division of labour (technical economies of scale)

Answer 5

Larger firms can fully exploit specialisation because they produce enough products for it to be cost effective to divide production into many specialised tasks

Question 6

Efficient use of capital (technical economies of scale)

Answer 6

Specialisation ensures that each item of capital equipment is used throughout the day, rather than being used only when a worker reaches a certain stage of the production process

Question 7

Research and development (technical economies of scale)

Answer 7

Large firms can afford the high costs of research and development and are thus more likely to introduce new products or processes. This can decrease competition and help firms increase demand and benefit from high prices.

Question 8

Economies of indivisibility (technical economies of scale)

Answer 8

Many goods need to be produced on a large scale in order to maximise efficiency. Smaller firms may be forced to underuse machines (or use a smaller scale of production that is less efficiency) and so small firms will have higher AC than larger firms.

Question 9

Financial economies of scale

Answer 9

Cheaper to access finance because they are less risky than smaller firms.
Also easier to sell shares (main source of finance)

Question 10

Purchasing economies of scale

Answer 10

Greater output means that materials can be bought in bulk at lower costs. They can also bargain with suppliers as they are often a large source of demand.

Question 11

Marketing economies of scale

Answer 11

Advertising costs can be spread over more units of output if a firm produces on a large scale.
Also a wider scope available e.g. TV

Question 12

Risk bearing economies of scale

Answer 12

Large firms have a diversity of products in a diversity of markets, and a range of suppliers. These help protect firms from sudden changes such as decreased demand.
Also protected from overspecialisation.

Question 13

Managerial economies of scale

Answer 13

Large firms can employ specialist managers, thus benefitting from division of labour. Also can hire best managers- successful decision making