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Difficulty: EasyScales of Production and Economies of Scale

When a growing bakery enterprise in Ogun State lowers its long-run average cost of production specifically by purchasing flour and sugar in bulk at discounted prices, this cost reduction is best described as which type of economy of scale?

  1. Internal commercial economy of scaleAnswer
  2. B
    External financial economy of scale
  3. C
    Short-run variable cost reduction
  4. D
    Internal managerial diseconomy of scale

Answer

Internal commercial economy of scale
Internal commercial (or marketing) economies of scale arise when an individual firm expands its output and buys raw materials in bulk, obtaining discounts that reduce its long-run average cost per unit produced.

Step-by-Step Solution

1
Determine if the cost saving originates within the firm or externally from the industry environment.
The cost advantage is achieved directly by the individual firm expanding its own purchasing volume, which makes it an internal economy of scale.
Internal economies of scale are firm-specific cost reductions resulting from the growth of the individual firm's production scale.
2
Identify the functional category of the cost reduction.
Securing discounts by purchasing inputs in bulk reduces marketing and commercial expenditures per unit.
Commercial (or marketing) economies of scale occur when large-scale operations enable a business to negotiate bulk purchase discounts and lower freight charges per unit.

Key Concept

Internal Commercial Economies of Scale
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Topics

Scales of Production and Economies of Scale

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