Where scale savings come from
| English | 中文 | Pinyin |
|---|---|---|
| internal economy of scale/ɪnˈtɜːnl ɪˈkɒnəmi ɒv skeɪl/ | 内部规模经济 | nèi bù guī mó jīng jì |
| external economy of scale/ekˈstɜːnl ɪˈkɒnəmi ɒv skeɪl/ | 外部规模经济 | wài bù guī mó jīng jì |
A decision you can investigate
- A packaging firm orders larger batches of cardboard and appoints specialist managers. Nearby firms share access to trained workers and transport links.
- Some savings come from the firm itself; others come from its industry or location.
Build the explanation
- Internal purchasing economies come from bulk discounts; marketing costs can spread over more sales; technical economies use efficient large equipment. Financial economies can mean cheaper access to finance; managerial economies use specialists; risk-bearing economies spread exposure across products or markets.
- External economies come from a shared skilled workforce, infrastructure, suppliers or nearby related businesses. The firm need not itself grow to benefit from improvements in its surrounding industry.
Work through the evidence
- An advertisement costing 600 yuan supports 100 sales at one scale and 300 at another. Marketing cost per sale = advertising cost
- sales: first 600/100 = 6 yuan, later 600/300 = 2 yuan.
- A new local supplier can reduce delivery costs for several firms: an external economy. One firm’s bulk-purchase discount instead arises from its own buying scale: an internal purchasing economy.
What is marketing cost per sale after sales rise to 300?
Divide the same advertising cost by 300 sales: 600/300 = 2.
Test the limits
- Larger buying scale does not guarantee a discount, and financing depends on risk as well as size. Product diversification spreads some risks but adds management demands.
- Name the actual cost mechanism. A list of six economy labels without showing how average cost falls is not an explanation.
Which illustrates a managerial economy?
Specialist management is an internal mechanism that can lower average cost.
An improved industry labour pool can benefit a firm even without its own expansion.
The shared environment, not just firm size, can create external economies.
Apply and explain your answer
- Why is the shared local supplier an external rather than an internal economy?
- It improves conditions available to several firms in the industry or area, rather than arising solely inside one firm.
Why might product diversification create a risk-bearing economy?
Different markets can offset some fluctuations without removing all risk.
Use the terms precisely
- internal economy of scale 内部规模经济: A cost advantage arising from a firm’s own larger production scale.
- external economy of scale 外部规模经济: A cost advantage arising from growth or improved conditions in the industry or area.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
An advertisement costing 600 yuan supports 100 sales at one scale and 300 at another. Marketing cost per sale = advertising cost sales: first 600/100 = 6 yuan, later 600/300 = 2 yuan. A new local supplier can reduce delivery costs for several firms: an external economy. One firm’s bulk-purchase discount instead arises from its own buying scale: an internal purchasing economy.
Larger buying scale does not guarantee a discount, and financing depends on risk as well as size. Product diversification spreads some risks but adds management demands. Name the actual cost mechanism. A list of six economy labels without showing how average cost falls is not an explanation.
Internal purchasing economies come from bulk discounts; marketing costs can spread over more sales; technical economies use efficient large equipment. Financial economies can mean cheaper access to finance; managerial economies use specialists; risk-bearing economies spread exposure across products or markets.