Economies of Scale Essay -- Economics Economy Essays

Economies of Scale Economics Test 1. Define and explain all Internal Economies of Scale:  · Internal Economies of Scale:Are reductions in long-run average cost as the size and output of a firm increases. In other words, they are advantages that large firms have because they are large. As they grow larger in the long-run they manage to raise their output faster than the rise in their total costs. The result is lower long-run average cost. - Marketing economies- Both in buying materials and selling its finished goods a large firm is n a better position than a smaller one. In buying the products it needs, the large firm often pays less for raw materials, machinery and so on because suppliers are sure they are going to get large orders and do not want to lose a big customer. E.g. A producer of shoelaces will sell its products for à ¢Ã¢â‚¬Å¡Ã‚ ¤1 per packet to Nike because it has an order of 1000 packets per week. But for Adidas it will sell them à ¢Ã¢â‚¬Å¡Ã‚ ¤2 because it has only an order of 100 packets per week. So Nike has a lower cost per packet compare to Adidas. In selling its products, Nike can afford to pay for expensive and professionally made advertisements or employ specialist salesmen much easier than Adidas. The large total cost of advertising can be spread over a large output that is sold. Therefore, the average cost of advertising will be low. - Financial economies- If Nike is going to borrow money because it is a well known firm, it is considered more reliable, and less risky is easier to borrow than Adidas. So Nike can borrow a large amount of money with a lower interest rate compared to Adidas. E.g. If Nike borrows à ¢Ã¢â‚¬Å¡Ã‚ ¤1, 000000 it will pay an 8% interest rate while if Adidas borrows à ¢Ã¢â‚¬Å¡Ã‚ ¤1,000 it wil... ...At OQ the firm is enjoying Internal Economies of Scale and its average cost falls. Beyond this point, further growth would make the firm less efficient. Instead of producing with a low average cost, extra production would cause the average cost of each unit of output to rise. 8. Why do small firms still exist? - New firms - Firms do not start large. In other words. Many firms are small because they are new. Those that will be successful are expected to become large over the years. - Desire to remain in control- Sometimes owners of small firms may not want the firm to grow too large in case they lose personal control. - Lack of Finance- Small firms find it difficult to expand because they cannot raise finance. Large companies have huge retained profits and also can sell shares to the general public. Small firms can neither of these.