Economies of Scale Essay -- Economics Economy Essays

Economies of home baseEconomics Test1. Define and explain all Internal Economies of racing shell Internal Economies of ScaleAre reductions in long-run average termsas the size and output of a firm increases. In different words, they argonadvantages that voluminous firms pee because they are large. As they set about large in the long-run they manage to raise their output faster thanthe upgrade in their amount of money costs. The result is smaller long-run averagecost.- marketing economies- Both in buying materials and selling itsfinished goods a large firm is n a better position than a small one.In buying the products it needs, the large firm often pays less for bare materials, machinery and so on because suppliers are sure they aregoing to turn large ranges and do not want to lose a large customer. E.g.A producer of shoelaces will sell its products for 1 per packet toNike because it has an piece of 1000 packets per week. But for Adidasit will sell them 2 because it ha s only an order of 100 packets perweek. So Nike has a lower cost per packet differentiate to Adidas.In selling its products, Nike can afford to pay for expensive andprofessionally made advertisements or employ specialist salesmen mucheasier than Adidas. The large total cost of advertising can be spreadover a large output that is sold. Therefore, the average cost ofadvertising will be low.- Financial economies- If Nike is going to take up money because it isa well know firm, it is considered more reliable, and less risky iseasier to borrow than Adidas. So Nike can borrow a large amount ofmoney with a lower by-line rate compared to Adidas. E.g. If Nikeborrows 1, 000000 it will pay an 8% interest rate bit if Adidasborrows 1,000 it wil... ...At OQ thefirm is enjoying Internal Economies of Scale and its average costfalls. Beyond this point, however growth would make the firm lessefficient. Instead of producing with a low average cost, extraproduction would cause the average cost of apiece unit of output torise.8. Why do small firms still equal?- New firms - Firms do not start large. In other words. many a(prenominal) 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.- privation 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 popular public. Small firms can neither of these.