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Difficulty: MediumSmall Scale and Large Scale Production

A large-scale garment manufacturing firm reduces its average cost per unit by purchasing raw materials in bulk at heavy discounts and negotiating lower freight rates for bulk transportation. Which specific internal economy of scale does this cost reduction represent?

  1. A
    External economies of scale
  2. Commercial economies of scaleAnswer
  3. C
    Economies of specialization
  4. D
    Reduction in factor rewards

Answer

Commercial economies of scale
Commercial economies of scale occur when an enterprise leverages its large size to purchase inputs in bulk at discounted prices and secure preferential transport rates. Because these financial benefits are derived directly from the firm's commercial operations, this cost reduction represents a commercial economy of scale.

Step-by-Step Solution

1
Analyze the operational advantage described in the scenario.
The firm receives quantity discounts on raw materials and reduced transport tariffs due to large shipment volumes.
Identifying the mechanism of savings clarifies which category of internal economies of scale applies.
2
Classify the advantage within production economics.
Savings realized through buying, selling, and bulk freight negotiations are classified as commercial economies of scale.
Large firms use their market power to bargain for better trading terms, lowering overall unit costs.

Key Concept

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

Small Scale and Large Scale Production

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