That is, as a company grows larger and larger, overall expenses are bound to increase. For example, a supermarket might invest in database technology that improves stock control and reduces … The local shop vendors are worried about the same and wanted to know why it is so that despite selling at a lower price it is still able to make a profit and also are able to expand. On occasion, this has led to boycotts. For example, the firm may be able to obtain higher levels of credit due to its size. Examples include: 1. If the scale of production increases beyond the optimum scale, the cost of financial capital rises. Layers and layers of organizational bureaucracy are put in place, making it inefficient for employees to do their job. “External” applies to an industry as a whole. Examples include:Internal:1. Examples of Internal Economies . For example, companies with high fixed costs tend to benefit the most as these costs can be spread out per customer. As firms grow larger, they can benefit from buying in bulk and cheaper prices. For example, it’s far cheaper and efficient to serve 1,000 customers at a restaurant than one. For example, the airline industry has significant fixed costs. When a firm grows too large, it can suffer from the opposite – diseconomies of scale. If average costs fall when firm output increases, it means that the per-unit cost falls with an increase in the scale of production. That allows them to master a specific skill, benefiting the company through greater efficiency. The larger the expansion of the size of production of firms, the greater will be the internal economies secured by a firm. For example, an airline may invest $20 million into a new airplane. So when an airline grows bigger, it is able to attract more customers and thereby reduce the cost per customer. Through the growth of the business, it can benefit from new production techniques and/or advanced equipment. It reduces the per unit variable costs. Examples include: 1.Technical economies of scale: These refer to gains in productivity/efficiency from scaling up production. When a company starts to grow, it is easy for employees to feel like they are ‘another cog in the wheel’. So for example, the local council may build a new railway line. If we look at Facebook, for example, its growing popularity made it a hit within social networks, making it grow exponentially. Economies of scale are caused by firms growing to a size by which they are able to benefit from a number of efficiencies. Some organizations become too big and lose sight of what is being spent. Economies of scale refer to the lowering of per unit costs as a firm grows bigger. Henry Ford capitalized on this and other internal economies of scale when he created the first modern automobile assembly line in the early 20th century. As a result of increased production, the fixed cost gets spread over more output than before. This situation increases economic efficiency as relatively limited training can allow workers to become excellent at their assigned tasks. There are five main internal economies of scale. These are the cost advantage that an organization obtains due to their scales of operation. Average costs fall at first, reach an optimum point and then rise. 1. For example, a new local restaurant is more likely to fail than a McDonald’s store – so they are afforded better rates to account for risk. It must pay for the airplane, the hire of the airport, and contracted salaries. Fig. Thats because large … Internal economies of scale are caused by factors within the firm, whereas external EoS are based on changes outside the company (see also types of external economies of scale). Starting from there, in this article, we will take a closer look at six different types of internal economies of scale: (1) technical, (2) managerial, (3) marketing, (4) financial, (5) commercial, and (6) network economies of scale. Businesses benefit from economies of scale when long-run average costs fall as production levels rise. Examples of Internal Economies of Scale Buying Economies of Scale – When businesses make large purchases or borrow a lot of money, unlike small purchases and loans, they get special discounts. Examples of economies of scale include Tap Water – High fixed costs of a national network To produce tap water, water companies had to invest in a huge network … This is incorporated as a downward-sloping average cost curve. A growing business can easily grow itself right out of its existing quarters or find itself faced with equipment and a workforce that is seriously undersized relative to the needs of the growing demand for the product. Emphasis is often placed on technical economies such as using plant at a greater capacity to reduce unit costs. For instance, it might be to leave the country because the regulatory costs are too high. As it grew through networks, the amount it could charge for adverts equally grew. For instance, the organizational structure and process management can become too complex if it is not controlled efficiently. External economies are slightly different from internal economies in the fact that they occur outside, independent of the firm, but within the industry. Often in such big companies, you are passed on and on and on again – taking, what should be an easy issue to resolve, significantly longer. In turn, we can see what is often referred to as ‘diseconomies of scale’, where businesses start to become more inefficient. Even the avenues of financial opportunity change, as large businesses gain access to private investors and investment bank services that are not typically available to smaller firms. As supermarkets like Walmart are big customers for independent farmers, they have a greater negotiating power over them. When a firm grows too large, it can suffer from the opposite – diseconomies of scale. Government influence3. Economists recognize both external and internal economies of scale. For example, Apple splits its operations down into design, hardware, software, manufacturing, marketing, production, and assembly. Internal diseconomies are factors that are directly controlled by the firm. For Example When industry expands machinery and raw material is available to all the firms at cheaper rates. As a company grows larger, it often seeks to grow further. However, when a business reaches a certain size, it can become less efficient – meaning the average cost to produce a unit increases. As the firm is able to reduce its average cost per unit – it can feed into lower prices for the consumer. Economies of scale bring down the per unit variable costs. Coca-Cola for example operates a similar function with its bottle manufacturers who operate in close proximity due to the sheer demand. External economies of scale (EEoS) External economies of scale occur outside of a firm but within an industry. Figure 1. Now that may benefit the firm through the division of labour, but it makes communicating between teams difficult. The graph above plots the long run average costs faced by a firm ag… At the same time, the actual availability of credit is much more accessible. Financial Economies 2. Network Economies 3. A large factory can invest in robotic machinery that reduces the cost of labor, for example, but the same investment might have been out of reach when the firm was smaller. 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