(a) What Is economies of scale? (b) Outline three internal economics of scale a firm can enjoy (c) State three factors that can influence where a firm is si...

Answer Details

(a) Economies of scale. These are the cost advantages, seen as a fall in the long-run average (unit) cost of production, that a firm enjoys as it expands its scale of output. As output rises, total cost is spread over more units and specialised resources are used more efficiently, so cost per unit falls.

(b) Three internal economies of scale. (These arise from the growth of the individual firm itself.)

• Technical economies: a large firm can install big, specialised, more efficient machinery and use methods of mass production that lower unit cost.
• Managerial economies: a large firm can employ specialist managers and divide administrative work, raising efficiency without a proportionate rise in cost.
• Financial economies: large firms borrow more easily and at lower interest rates and can raise capital from many sources.
• Marketing (commercial) economies: bulk buying of inputs at discounts and bulk selling reduce cost per unit.

(c) Three factors that influence where a firm is sited (location factors).

• Nearness to raw materials: especially where materials are bulky or perishable, to cut transport cost.
• Availability of labour: supply of suitable skilled or cheap labour.
• Access to market: nearness to consumers reduces distribution cost.
• Transport and infrastructure: good roads, power and water supply.

Examination reminder: keep internal economies (from the firm's own growth) distinct from external economies (from growth of the whole industry).