Economies of Scale

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Economies of Scale

These occur when mass producing a good results in lower average cost. Economies of scale occur within an firm (internal) or within an industry (external).

Internal Economies of Scale

These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of:

  • Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively.
  • Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc.
  • Financial economies made by borrowing money at lower rates of interest than smaller firms.
  • Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.
  • Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.
  • Research and development economies made when developing new and better products.
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External Economies of Scale

These are economies made outside the firm as a result of its location and occur when:

  • A local skilled labour force is available.
  • Specialist local back-up forms can supply parts or services.
  • An area has a good transport network.
  • An area has an excellent reputation for producing a particular good. For example, Sheffield is associated with steel.

Internal Diseconomies of Scale

These occur when the firm has become too large and inefficient. As the firm increases production, eventually average costs begin to rise because:

  • The disadvantages of the division ...

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Here's what a star student thought of this essay

The spelling and grammar in the essay was fine. Personally I didn’t see any mistakes and was happy with vocabulary, as it had the correct technical terms. The use technical vocabulary is thoroughly recommended as it raises the level of explanation given. This received four stars as it demonstrated good understanding and explanation of the topics, yet the level of explanation could have been raised higher with the use of more graphs, specifically an average cost graph.

The analysis required is minimal and is reflected in the essay, as the author explains integration and economies of scale, yet refrains from any analysis.

The author clearly answers the question, as it does the basic explanation and example response. The response is almost ideal as the definition is quite clear, but to make it better they could have introduced an average cost curve, to make the explanation even clearer. The lack of the graph has limited it to four stars, w which is a shame as it has all the other information required to reach five. The essay is wrongly titled as it implies that it is solely about economies of scale when in fact it has an accurate description of integration.