How can the Nigerian National Petroleum Corporation achieve internal economies of scale?

Answer Details

Internal economies of scale are the cost advantages a single firm enjoys as it grows larger and expands its own output. As a very large organisation, the Nigerian National Petroleum Corporation (NNPC) can achieve them in the following ways:

• Technical economies: it can install and fully use large, specialised and indivisible plant such as refineries, pipelines and storage depots, spreading their cost over a huge output so that cost per unit of oil falls.
• Managerial economies: being large, it can employ specialist managers, engineers and accountants each handling one department, raising efficiency and lowering cost per unit.
• Financial economies: as a big and reputable corporation it can raise large loans and capital more easily and at lower interest rates than small firms.
• Marketing (commercial) economies: it can buy inputs and equipment in bulk at discounts and sell its products in large quantities, reducing buying and selling costs per unit.
• Risk-bearing economies: by diversifying into exploration, refining, distribution and petrochemicals, it spreads its risks so that a loss in one area is offset by gains in another.
• Research economies: its large size lets it fund research and development into better and cheaper methods of production, whose cost is spread over large output.