ECO-Firms, page no 217 #ECO #Firms

What are economies of scale:

Economies of scale refer to the cost advantage that businesses experience when production becomes efficient. This happens as a company produces more goods, allowing the cost per unit of output to decrease. The reduction in cost per unit arises because fixed costs (like rent, machinery, or salaries for core staff) are spread over a larger number of goods, and operational efficiencies improve.

Internal economies of scale:

Internal economies of scale occur within a company as it grows and increases its production. These cost-saving advantages arise from the company's ability to optimize its operations, making production more efficient and reducing the average cost per unit. Examples include technical economies, where a company invests in more efficient machinery or advanced technology to boost productivity. Managerial economies arise when the company can afford to hire specialized managers who improve decision-making and operations. Financial economies occur when a large company secures loans or financial services at lower interest rates because it is seen as less risky by lenders. Additionally, bulk purchasing allows the company to buy raw materials in larger quantities at discounted rates. Overall, internal economies of scale enable a company to operate more efficiently as it grows, reducing costs and enhancing competitiveness.

External economies of scale:

External economies of scale refer to cost advantages that a company gains due to factors outside of its own operations, often as the industry or market in which it operates grows and becomes more efficient. These cost benefits are not unique to one firm but arise from overall improvements in the industry environment. As more firms enter a particular industry, the surrounding infrastructure, supply chains, and knowledge base improve, reducing costs for all firms within that industry.

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