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Explain Internal Economies of Scale?

by Puja

Internal economies are caused by factors within the firm. It measures the company efficiency of production. The company focus on improving the output to reduce the product average cost.

Six different types of internal economies of scale: (1) technical, (2) managerial, (3) marketing, (4) financial, (5) commercial, and (6) network economies of scale.


1.     Technical economies of scale

Firstly, this can be achieved through improvements and optimizations within the production process. When the output increases, the firm will invest more in efficient equipment and optimise operation based on experience. Efficient machinery result in producing output at lower cost.

2.     Managerial economies of scale

The employment of specialised workforce result in managerial economies of scale. Hence as the organisation grow, they hire more expert staff and create a specialised business unit. In addition, the firm efficiency is increased by employing specialist, accountants, human resource, etc which will result in reducing the cost of production and increase revenue.

3.     Marketing economies of scale

Marketing economies of scale is the ability to spread advertising and marketing budget over an increasing output. Thus as the production increases the firm can fix marketing expenses, which will reduce the per unit cost of production. Thus, Better advertisement result in reaching larger audience and increase the sale of the firm.

4.     Financial economies of scale

Access of financial and capital market result in financial economies of scale. Hence large firms find easier and cheaper to raise funds. As the firm grow, it is consider to be more credit worthy. They can easily raise fund from banks, stock markets.

5.     Commercial economies of scale

Reduction in price due to discounts or bargaining power result in commercial economies of scale. Larger firms can buy goods and services in larger quantities. Thus they get larger discount and can bargin to negotiate lower prices. Moreover this means they pay less for each item purchases.

6.     Network economies of scale

When the marginal costs of adding additional customers are extremely low result in network economies of scale. Hence this means larger firm can support large numbers of new customers with their existing infrastructure can substantially increase profitability as they grow.

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