Explain how a firm may benefit from both internal and external economies of scale | AQA A-Level Economics Model Answer | 15 marks

Explain how a firm may benefit from both internal and external economies of scale. (November 2021)

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

Internal economies of scale are when long run average costs for one firm as their output increases. For example, as a firm gets larger, they could choose to buy in bulk. Buying in bulk works out cheaper per item, and this means that a large firm would see a fall in long run average costs compared to a smaller firm who cannot buy in bulk. These are called purchasing economies of scale. One more example would be a larger firm setting up better technology such as self checkout machines, which may cost a lot to set up, but would be used a lot more - therefore, the average cost (cost divided by output) would be quite low. These are called technical economies of scale.

Average cost is the total cost divided the output. The diagram shows this falling as output increases.

ECONOMIES OF SCALE DIAGRAM

External economies of scale are when long run average costs fall for all the firms in the industry as output increases. For example, better transportation (more specialised delivery companies) will allow all firms in the given industry to become more productive, so the same number of workers can produce a greater output, therefore average costs would be lower due to the better available transportation. Another example is if there is better education and training, all firms would be able to choose from more skilled workers, so all firms would be more productive on average, so they would have a lower average cost - as they can produce the same output with less staff, as each worker is more productive.