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Question

Difficulty: MediumInternal and External Economies of Scale

A large flour milling company in Lagos reduced its average unit production cost by securing high-volume bulk discounts on raw wheat imports and obtaining lower bank interest rates due to its substantial creditworthiness. Which of the following best classifies the cost advantages gained by this firm?

  1. Internal financial and commercial economies of scaleAnswer
  2. B
    External economies of scale arising from industrial localization
  3. C
    External research and training economies of scale
  4. D
    Specialization dis-economies resulting from worker division of labour

Answer

The cost advantages gained by the firm are classified as internal financial and commercial economies of scale.
The correct answer identifies internal financial and commercial economies of scale. Internal economies of scale are lower average costs enjoyed exclusively by a specific business entity as it expands its own scale of operation. Bulk purchasing discounts are commercial economies, and lower interest rates due to large asset collateral are financial economies.

Step-by-Step Solution

1
Analyze the origin of the cost reduction
The cost savings arise from the firm's internal decision to expand operations, buy in bulk, and leverage its own asset size for cheaper credit.
Cost reductions generated inside a single firm due to its own growth are classified as internal economies of scale.
2
Categorize the specific types of internal economies described
Bulk discounts represent commercial (marketing) economies, while cheaper bank credit represents financial economies.
Commercial economies stem from buying raw materials in bulk at reduced rates, and financial economies stem from larger firms obtaining loans at lower interest rates.

Key Concept

Internal Economies of Scale
Estimated Time:1m 0s
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Topics

Internal and External Economies of Scale

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