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Difficulty: HardScales of Production and Economies of Scale

Match each type of internal economy of scale on the left with its corresponding operational cause or advantage on the right.

  • Technical EconomiesDeploying specialized, high-capacity indivisible capital machinery efficiently
  • Financial EconomiesSecuring credit facilities at lower interest rates due to large collateral assets
  • Commercial EconomiesObtaining bulk discounts on raw material purchases and reduced unit freight costs
  • Risk-Bearing EconomiesSpreading business risks across diversified product lines and market segments

Answer

Technical Economies matches with deploying specialized indivisible capital machinery; Financial Economies matches with securing credit facilities at lower interest rates; Commercial Economies matches with obtaining bulk discounts on purchases; Risk-Bearing Economies matches with spreading business risks across diversified product lines.
Each type of internal economy of scale corresponds to a distinct operational advantage realized during expansion: technical economies derive from specialized machinery efficiency, financial economies from lower credit costs, commercial economies from bulk buying discounts, and risk-bearing economies from product diversification.

Step-by-Step Solution

1
Analyze Technical Economies of scale.
Technical economies relate directly to production techniques, specifically the deployment of large-scale, specialized indivisible machinery.
Large enterprises can operate specialized capital equipment at optimum capacity, reducing average unit costs.
2
Analyze Financial Economies of scale.
Financial economies concern capital acquisition capabilities, where established large firms command lower borrowing rates.
Financial institutions view large firms with valuable collateral assets as low-risk borrowers.
3
Analyze Commercial (Marketing) Economies of scale.
Commercial economies involve trading activities, such as buying raw inputs in bulk and securing lower unit freight rates.
Bargaining power increases with transaction volume, reducing procurement costs per unit.
4
Analyze Risk-Bearing Economies of scale.
Risk-bearing economies involve spreading operational risk through product diversification and market expansion.
Losses or downturns in one market segment can be offset by profits in another.

Key Concept

Internal Economies of Scale Classifications and Mechanisms
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Topics

Scales of Production and Economies of Scale

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