(a) Explain the term internal economies of scale. [4 marks] (b) Outline any four economies of scale a firm enjoys as it grows in size. [16marks]

Answer Details

(a) Internal economies of scale are the cost advantages that a single firm enjoys as it expands its own scale of production, causing its average (unit) cost of production to fall. They arise from within the firm itself, not from the growth of the whole industry.

(b) Four economies of scale enjoyed as the firm grows:

1. Technical economies: a large firm can install big, specialised and more efficient machines and use methods (such as mass production) that spread fixed costs over more units, lowering cost per unit.
2. Managerial economies: a large firm can employ specialist managers for separate departments (production, finance, marketing), so it is more efficiently run and management costs per unit fall.
3. Marketing (commercial) economies: by buying raw materials in bulk it obtains discounts, and it spreads advertising and selling costs over a large output, reducing cost per unit.
4. Financial economies: a large, well-known firm can raise capital more easily and at lower interest rates than a small firm, because lenders regard it as more secure.

(Other acceptable types: risk-bearing economies through diversifying products and markets, and research economies from funding its own research and development.)