Examkin

Question

Difficulty: EasyInternal and External Economies of Scale

A commercial poultry firm in Ogun State reduces its average cost of production per bird by purchasing large quantities of feed directly from manufacturers at discounted prices. Which type of economy of scale does this scenario illustrate?

  1. Internal commercial economyAnswer
  2. B
    External financial economy
  3. C
    External technical economy
  4. D
    Internal technical diseconomy

Answer

Internal commercial economy
The correct answer is internal commercial economy because bulk purchasing discounts directly reduce the average unit production cost of an individual expanding firm.

Step-by-Step Solution

1
Identify the source of cost reduction in the scenario
The firm achieves unit cost reduction through bulk purchasing discounts on raw feed.
Bulk buying directly reduces input costs as purchase volume grows.
2
Classify whether the economy is internal or external
It is an internal economy of scale.
The cost savings arise from the specific purchasing actions and growth of this individual firm, rather than sector-wide expansion.
3
Determine the specific category of internal economy
It is a commercial economy of scale.
Commercial (or marketing) economies occur when an expanding firm secures trade discounts and favorable terms when buying raw materials or selling finished products.

Key Concept

Internal commercial economies of scale occur when an individual firm lowers its average costs by obtaining bulk purchasing discounts or marketing advantages as it expands.
Estimated Time:45s
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Topics

Internal and External Economies of Scale

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