Examkin

Question

Difficulty: MediumScales of Production and Economies of Scale

A pharmaceutical firm operating in Onitsha, Anambra State, experiences a reduction in its average unit cost of production because the concentration of related chemical and packaging enterprises in the region has attracted specialized maintenance engineers and lowered shared material transport expenses for all producers in the area. Which type of economic advantage does this situation illustrate?

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

Answer

The scenario illustrates an external economy of scale, as the cost reductions result from industry localization and shared regional infrastructure available to all firms in the area.
The term 'external economy of scale' refers to cost advantages enjoyed by individual firms as a result of the expansion and concentration of the industry as a whole. In Onitsha, the clustering of pharmaceutical and chemical firms creates localized benefits such as specialized engineering support and lower shared transportation costs, benefiting all firms in the area.

Step-by-Step Solution

1
Analyze the source of the cost reduction described in the stem.
The cost savings arise from external factors—specifically, the concentration of related chemical and packaging firms in Onitsha attracting specialized service providers and reducing shared supply costs.
Determining whether the cost efficiency is internal (firm-specific expansion) or external (industry/regional growth) is essential for correct classification.
2
Distinguish between internal and external economies of scale.
Internal economies accrue to a single expanding firm due to its own operational growth. External economies accrue to all firms within an industry due to industrial localization and general sector expansion.
Since all local producers benefit from the presence of maintenance engineers and cheaper transport, the advantage is external.

Key Concept

Internal vs. External Economies of Scale
Estimated Time:1m 15s
Rate this question

Topics

Scales of Production and Economies of Scale

More questions from this topic