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Question

Difficulty: MediumSmall Scale and Large Scale Production

When a large-scale manufacturing firm obtains price discounts by purchasing raw materials in bulk, it is benefiting from financial economies of scale.

Answer: Answer

Answer

The statement is False. Obtaining price discounts through bulk purchasing of raw materials is a commercial (buying) economy of scale, whereas financial economies of scale refer to advantages in raising capital and obtaining favorable credit terms.
The statement is false because obtaining discounts through bulk purchasing is a commercial (or buying) economy of scale. Financial economies of scale strictly involve a large firm's ability to raise capital easily and obtain loans at lower interest rates due to greater collateral and credit standing.

Step-by-Step Solution

1
Identify the economic activity described in the statement.
The scenario describes a large firm obtaining price discounts through bulk raw material purchases.
Analyzing the specific source of cost reduction is necessary to categorize the internal economy of scale correctly.
2
Differentiate between commercial economies and financial economies of scale.
Bulk buying discounts fall under commercial economies, while financial economies relate to capital acquisition, borrowing privileges, and lower interest rates.
Commerce concepts distinguish procurement advantages from credit and capital market advantages.
3
Determine the truth value of the statement.
The statement incorrectly misclassifies a commercial economy of scale as a financial economy of scale.
Because bulk procurement discounts are commercial benefits, the statement is false.

Key Concept

Internal Economies of Scale: Commercial vs Financial Economies
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Topics

Small Scale and Large Scale Production

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