Internal Economies of Scale

• Internal Economies of Scale: These are the advantages an organisation gains due to an increase in its size. These advantages cause an increase in productive efficiency and decrease total cost of production
• (Internal) Marketing economies of scale:

  • Costs such as advertising can be spread over more units of output if a firm produces on a large scale so advertising campaigns become more cost effective for larger firms
• (Internal) Purchasing economies of scale:

  • Greater output means that materials can be bought in bulk at a lower cost, therefore larger firms are able to buy materials more cheaply then smaller firms
• (Internal) Financial economies of scale:

  • Larger firms benefit by being able to obtain loans and overdrafts from banks easily. Furthermore, the terms of the loan such as the interest rate to be paid and the length of time allowed before repayment will be more flexible.
  • Additionally, larger firms may find it easier to sell shares as a limited company. These shares allow firms to reinvest back into their business to make more money which boosts the share price
• (Internal) Technical Economies of Scale:

  • Larger firms can use large-scale equipment more effectively. For example doubling the size of containers does not correlate to a doubling of costs therefore average costs fall. (economies of increased dimension)
• Risk-bearing economies of scale

  • Large firms often diversify into different products and different markets. These help protect firms from sudden changes such as a fall in demand. This helps protect them from the risk of overspecialisation (However, this may mean that a firm may not be able to fully exploit the other internal economies of scale)
• (Internal) Managerial economies of scale:

  • Large firms can employ specialists managers, thus benefiting from division of labour amongst their management staff as well as their production line employees. Good decision making can mean huge increases in profits and so can attract better managers by offering higher salaries