Theory question 104
Theory of Production(a) Explain the term internal economies of scale.
(b) Outline any four economies of scale a firm enjoys as it grows in size.
Show the model answer
Model answer
(a) Internal economies of scale are the cost advantages (lower average cost) that a single firm enjoys from its own expansion, independent of other firms.
(b) Any four: technical economies (better machines, division of labour); managerial economies (specialist managers); financial economies (easier, cheaper loans); marketing/commercial economies (bulk buying and selling, cheaper advertising per unit); risk-bearing economies (diversification); research and development economies; welfare economies.
Explanation
Each economy should explain how average cost falls as the firm grows.