(a) What is an industry? (b) Explain the following: i. division of labor ii. economies of scale (c) Outline any four internal economies of scale.

Answer Details

(a) Industry. An industry is a group of firms engaged in the production of the same or similar kinds of goods or services (for example, the textile industry or the banking industry).

(b) Concepts:

• (i) Division of labour is the splitting of a production process into separate tasks so that each worker specialises in one particular task rather than doing the whole job. It raises output through greater skill and speed.
• (ii) Economies of scale are the cost advantages (falling average cost per unit) that a firm enjoys as it expands its scale of production and produces on a larger scale.

(c) Four internal economies of scale:

1. Technical economies: a large firm can use large, specialised and more efficient machines, lowering unit cost.
2. Managerial economies: a big firm can employ specialist managers for each department, improving efficiency.
3. Marketing (commercial) economies: it can buy raw materials in bulk at discounts and spread selling and advertising costs over more units.
4. Financial economies: a large firm can borrow more easily and at lower interest rates because it is seen as more creditworthy.

(Other valid internal economies: risk-bearing economies through diversification and research economies.)