Economies of Scale:
Large firms are able to take advantage of economies of scale, which
reduce their average costs of production
Economies of scale are the cost saving benefits of large-scale
operations, which reduce average costs of production
There are two types of economies of scale: internal and external
economies of scale
Internal economies of scale are economies of scale that arise from the
internal organisation of the business, and can be broken down into:
o Purchasing (bulk-buying) EoS – occur when costs of materials or
components needed in production falls when they are bought in
large quantities
o Technical EoS – occur when large firms purchase large pieces of
machinery and/or automated equipment for the production
process. Since such firms produce in big quantities, the initial cost
of such expenditure can be spread across the price of output
o Financial EoS – occur when large firms are more able to borrow
money from banks than small firms, as they have greater level of
security due to the large value of assets
o Managerial EoS – occur if large firms have the resources to
employ specialist managers to undertake functions within the
firm. Despite the high costs for such labour, it gets canceled out by
improved productivity of the firm
o Risk-bearing EoS – occur as very large firms produce a range of
products and operate in different locations, causing the risk of low
profits to spend across all the areas of firm’s activity
o Research and development (R&D) EoS – occur if large firms are
able to R&D and therefore can innovate and create products that
enable them to be market leaders
o Marketing EoS – occur as large firms tend to have large
advertising budgets, so can spend large amounts of money on
promoting their products
External economies of scale are economies of scale that arise from
factors outside of the firm, such as:
o Proximity to related firms – a firm will benefit from being located
close to its suppliers and/or customers as that will greatly reduce
transportation costs
o Availability of skilled labour – the more skilled labour there is in
the area, the easier it will be for firm to find the best person for
Large firms are able to take advantage of economies of scale, which
reduce their average costs of production
Economies of scale are the cost saving benefits of large-scale
operations, which reduce average costs of production
There are two types of economies of scale: internal and external
economies of scale
Internal economies of scale are economies of scale that arise from the
internal organisation of the business, and can be broken down into:
o Purchasing (bulk-buying) EoS – occur when costs of materials or
components needed in production falls when they are bought in
large quantities
o Technical EoS – occur when large firms purchase large pieces of
machinery and/or automated equipment for the production
process. Since such firms produce in big quantities, the initial cost
of such expenditure can be spread across the price of output
o Financial EoS – occur when large firms are more able to borrow
money from banks than small firms, as they have greater level of
security due to the large value of assets
o Managerial EoS – occur if large firms have the resources to
employ specialist managers to undertake functions within the
firm. Despite the high costs for such labour, it gets canceled out by
improved productivity of the firm
o Risk-bearing EoS – occur as very large firms produce a range of
products and operate in different locations, causing the risk of low
profits to spend across all the areas of firm’s activity
o Research and development (R&D) EoS – occur if large firms are
able to R&D and therefore can innovate and create products that
enable them to be market leaders
o Marketing EoS – occur as large firms tend to have large
advertising budgets, so can spend large amounts of money on
promoting their products
External economies of scale are economies of scale that arise from
factors outside of the firm, such as:
o Proximity to related firms – a firm will benefit from being located
close to its suppliers and/or customers as that will greatly reduce
transportation costs
o Availability of skilled labour – the more skilled labour there is in
the area, the easier it will be for firm to find the best person for
