Internal Economies of Scale
Internal Economies of Scale: Benefits of growth that arise within the firm.
- Purchasing and Marketing economies of scale: Purchasing in bulk leads to lower average costs
- Large firms are likely to get better rates when buying raw materials and components in bulk. Purchasing and marketing economies of scale large firms are likely to get better rates on buying raw materials components in bulk. In addition, administration costs involved in do does not rise in proportion to the order. The cost of processing an order for £10,000 tonnes coal does not treble when £30,000 tonnes of coal is ordered. Several marketing economies exist. A large company may find a cost-effective to acquire its own fleet for example. The cost to the Sales force of selling 30 product lines is not double that of selling 15 lines. Again, the administration cost of selling does not rise in proportion to the size of the sale.
- Technical Economies of Scale: Increasing output will lead to a lower average cost – principle of increased dimensions.
- Technical economies arise because larger plants are often more efficient. The capital cost and running cost of plants do not rise in proportion to their size for example the cost of a double-Decker bus is not double that of single decker bus. This is because the main cost of the bus does not double unlike output. The average cost will therefore fall.
- Indivisibility – the greater use of equipment will lead to a lower average cost. The replacement of labour by capital as a firm switch from job – flow production will mean that automation is more greatly exploited leading to lower average cost for that machine
- Law of multiples – Where a firm finds an equilibrium between slow and fast machines to allow for all machines to be operating at full capacity – increasing volume of slow machines to allow fast machines to operate at full capacity
- Specialisation and Managerial economies: Employment of specialist staff will lead to greater efficiency. Employment of specialist staff in a small firm will lead to indivisibility.
- Financial Economies: Larger firms find it easier to raise finance vs sole traders
- More sources
- Trusted more by financial institutions
- Often gain better interest rates
Risk – Bearing economies: Diversification into different markets or product lines spread risk.