Answer to Question #305042 in Management for sanky

Question

Large-scale production is considered economical in the sense of per unit cost. Explain the statement by describing different types of economies of scale. Give examples to substantiate your answer

Answer 1

Economies of scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced. This means that the greater the quantity of output produced, the lower the per-unit fixed cost.

There are two main types of economies of scale: internal and external. Internal economies are controllable by management because they are internal to the company. Internal economies result from a larger volume of production. External economies depend upon external factors. These factors include the industry, geographic location, or government.