Explain how a firm may benefit from both internal and external economies of scale.

AQA A-Level Economics Paper 1 June 2021

Explain how a firm may benefit from both internal and external economies of scale. (15 marks)

Economies of scale are when long run average costs fall as output increases.

Internal economies of scale occur when a specific firm's long run average costs fall as their output increases. Firms could benefit from purchasing economies of scale as they get larger as they could save money when purchasing factors of production or equipment. Buying in bulk works out cheaper per item, and this means that a large firm would see a fall in their long run average costs compared to a smaller firm who cannot buy in bulk. Another example of internal economies of scale are technical. A larger firm would be able to save cost when setting up new technology such as self checkout machines. They may cost a lot to set up, but would be used a lot more. Therefore, the average cost of acquiring the machinery would be lower as it is the same total cost, but a large firm could divide it across a greater output.

External economies of scale are when long run average costs fall for all the firms in the industry. For example, better transport would allow all firms in the given industry to become more productive, allowing an increase in output from the same factors of production. For example, all clothing businesses can depend on reliable delivery from companies like Royal Mail and Evri, and therefore they can all benefit from lower costs. Another example of external economies of scale is an improvement in education and training. This would allow firms would be able to choose from more skilled workers, allowing them to increase their productivity at all output levels, and reduce their average costs.

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