Question

what do you mean by economies of scale? how bulk buying is a benefit for the large firms?

Answer 1

✓ Economies of scale arises when firm faces lower average cost of production with more and more output. It is scenario when LRAC declines as Q increases. This economies of scale is long run concept i.e we see that firms enjoy lower cost of production as they increase the production. The economies of scale leads to firm becomes more efficient in production.

This economies of scale arises because firm's overhead cost and different other costs are spread over larger number of output. This economies of scale may be due to internal economies of scale or external economies of scale. Internal economies of scale arises when firm reduces its cost through internal activity like technical improvement, managerial efficiency, worker's efficiency etc. External economies of scale arises when external factors leads to lowering the costs like geographic location, government's activities etc.

✓ Economies of scale arises when firm produces large number of outputs. As firm produces large number of output firm can buy bulk amount of inputs together. As a result of this bulk buying the cost of inputs becomes low. As a result of this bulk purchase together the average cost of production becomes low. This bulk purchase reduces the transportation cost and input cost of production. As a result the company enjoys lower cost of production. This bulk buying benefits the large firm through reducing the average cost by lowering input costs and transportation cost. These two together lower the average cost of that input.