Economies of Scale


Economies of scale occur when a firm's increase in size results in the average cost per unit falling. Therefore, generally, as firms get larger they beome more efficient and help firms increase their sales, market share and profits. You can refer to economies of scale if the question ever relates to the firm increasing or decreasing in size.

Internal- economies of scale occur when a firm becomes more productive due to internal growth. Internal growth has its benefits and problems. Internal growth is good in that it is relatively inexpensive to achieve. Also with the exception of diversifying into a completely new product, the firm expands by doing more of what it is already good at- making its existing products. The problem is that it can take a long time to achieve growth. Some owners are not prepared to wait that long- that's why they choose external growth,.

Purchasing Economies- Bulk Buying- As a firm grows larger it will have to order more raw materials and components. As firms increase the size of their orders, it is likely that they will reduce the average costs of their components. Large orders are cheaper to manufacture and transport and suppliers will be willing


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