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Question

Difficulty: EasyInternal and External Economies of Scale

Match each form of economy of scale listed on the left with the specific operational advantage it provides to a firm or industry on the right.

  • Technical EconomyLower unit costs obtained by installing high-capacity specialized capital equipment within the plant.
  • Financial EconomyReduced borrowing rates on loans due to the firm's ability to offer valuable collateral to lenders.
  • Economy of ConcentrationLower overall costs enjoyed when multiple firms locate in one region to share dedicated transport infrastructure.
  • Economy of InformationReduced research expenses enjoyed by all firms in a sector through shared trade journals and industry reports.

Answer

Technical Economy matches with lower unit costs from installing high-capacity specialized capital equipment; Financial Economy matches with reduced borrowing rates on loans due to high collateral; Economy of Concentration matches with lower overall costs from shared regional infrastructure; Economy of Information matches with reduced research expenses from shared trade journals.
Technical Economy relates to high-capacity plant equipment operated by an individual firm. Financial Economy reflects lower interest rates on corporate loans due to collateral. Economy of Concentration represents external savings when clustered firms share regional transport infrastructure. Economy of Information represents external savings from industry-wide publications.

Step-by-Step Solution

1
Identify whether each listed economy of scale is internal (firm-specific) or external (industry-wide).
Technical Economy and Financial Economy are internal economies; Economy of Concentration and Economy of Information are external economies.
Internal economies stem from internal expansion, while external economies arise from the growth of the entire industry.
2
Pair the internal economies with their firm-level operational mechanisms.
Technical Economy pairs with high-capacity specialized capital equipment, and Financial Economy pairs with reduced borrowing rates on loans.
Large firms lower unit costs using complex machinery and negotiate cheaper capital due to lower risk.
3
Pair the external economies with their industry-level operational mechanisms.
Economy of Concentration pairs with shared regional transport infrastructure, and Economy of Information pairs with shared trade journals and reports.
Geographical clustering provides communal transport benefits, and industry research lowers information acquisition costs for all member firms.

Key Concept

Classification of Internal vs. External Economies of Scale
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Topics

Internal and External Economies of Scale

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