Economies of Scale

Internal Economies of Scale

Increasing the size of a firm provides an opportunity to change the way it is organized, run and financed to reduce the average or unit cost of production

External Economies of Scale

These are cost savings enjoyed by firms in large industries compared to firms in smaller industries

Internal Economies of Scale:

a)Financial economies: cost savings that arise from the way in which large firms raise money.

b)Marketing economies: Cost savings resulting from the way in which firms sell their products.

c)Technical economies: Cost savings caused by the methods of production used.

d)Risk-bearing economies: Cost savings that result from the way in which firms try to reduce the risk of a fall in demand for some of their products.

e)Purchasing economies e.g. discounts for bulk purchases

External Economies of Scale:

These are cost savings enjoyed by firms in a large industry

These may be:

  • Access to a skilled workforce because firms can recruit workers trained by other firms in their industry
  • Ancillary firms that develop and locate nearby large firms in other industries to provide them with the specialized equipment and business services they need
  • Joint marketing benefits: for example, new firms locating near to others in the same industry may share their reputation for producing high-quality products
  • Shared infrastructure: for example, the growth of an industry may persuade firms in other industries to invest in new infrastructure such as power stations, dock facilities and airports to meet increasing demand for these services

economies of scale

 

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