The Firm MCQ 1 (internal and external economies of scale)

What is the primary benefit of economies of scale?

Which of the following is an example of financial economies?

What is the primary advantage of specialization of labor?

Which of the following is NOT an internal economy of scale?

What is the primary purpose of investing in automation and machinery?

What is the primary driver of external economies of scale?

How can the expansion of an industry lead to lower recruitment costs?

What is a benefit of research and development in an industry?

What is an example of how the expansion of an industry can lead to lower costs of raw materials?

What is a result of improvement and infrastructure development in an industry?

Internal Economies of Scale

Refers to the reduction in cost per unit that a firm experiences when its output increases.

Types of Internal Economies

Purchasing Economies: Firms can negotiate discounts for bulk buying, reducing their cost per unit.
Specialisation of Labour: As output increases, workers become more efficient, reducing the cost per unit.
Financial Economies: Firms can negotiate low-interest rates, reducing their financial costs.
Automation/Machinery: Firms can invest in machines, lowering the cost per unit and increasing efficiency.

External Economies of Scale

External economies of scale occur when the expansion of an industry leads to a decrease in the cost per unit for all firms within that industry.

Examples of External Economies of Scale

Lower cost of raw materials: As the production of chocolate increases, milk suppliers expand and produce at lower cost per unit, leading to a decrease in the cost of raw materials for all chocolate firms.
Access to skilled labour: As the industry expands, more college courses are offered, leading to lower recruitment costs for firms.
Improvement and Infrastructure: As the industry expands, there is improvement in infrastructure, which benefits all firms.
Research and Development: When one firm develops new machinery or technology, all firms in the industry can benefit from this innovation, leading to a decrease in costs per unit.

Learn about the reduction in cost per unit that a firm experiences when its output increases, including types of internal economies such as purchasing, specialisation of labour, financial economies, and more.