Approach in explaining internal Economies of Scale Internal Economies of Scale lower unit costs achieved by a firm Cost of producing one unit of output when it expands its output or enlarges its scale of production Topic Sentence S An example of internal Economies of Scale is Technical economies of scale A larger firm would be in a better position to enjoy substantial internal EOS arising from large scale of production Elaboration of concepts There will be greater scope of specialisation of both labour and machinery Specialization of labour There is less time loss in workers switching from one operation to another Furthermore by performing the same actions repeatedly workers become more efficient in their jobs Specialization of machinery If production is broken down into many different stages machines can be designed specifically for each stage where many of the different stages in assembly are completed by computer controlled machines Elaboration using examples Link to EOS concepts Hence this raises productivity and efficiency and reduces unit costs leading to a fall in average cost of production for the firm Topic Sentence S An example of internal Economies of Scale is Managerial economies of scale A larger firm would be in a better position to enjoy substantial internal EOS arising from large scale of production Elaboration division of labour can be introduced into tasks of management where specialists can be employed to manage the firm Elaboration using examples Different specialists can be employed to take charge of bus network system database management administration manufacturing production operations and marketing business development Link to EOS concepts This raises productivity and Efficiency in management thus can reduce unit costs in large firms leading to a fall in average cost of production for the firm Topic Sentence S An example of internal Economies of Scale is Marketing economies of scale A larger firm would be in a better position to enjoy substantial internal EOS arising from large scale of production Elaboration The firm is able to enjoy discounts for bulk purchase and advertising cost A large firm buys its raw materials in bulk and large discounts are often offered by the suppliers Advertising costs can spread over a large volume of sales Moreover the large firm can save on advertising costs as the same advertisement helps to promote its range of products and not just one product Elaboration using examples Besides instead of buying from the wholesaler the large firm can buy directly from the producer For example a garment factory can obtain its textile from a mill at a discount while an independent tailor running a tailoring shop will have to obtain his supplies from the wholesaler Link to EOS concepts Hence these reduce unit costs in large firms leading to a fall in average cost of production for the firm Network economies of scale not in the lecture notes In economics a network effect also called network externality or demand side economies of scale is the effect that one user of a good or service has on the value of that product to other people When network effect is present the value of a product or service increases as more people use it Over time positive network effects can create a bandwagon effect as the network becomes more valuable and more people join in a positive feedback loop E g Singapore Airlines works with various partner airlines to offer improved network and service benefits to their customers For instance by being part of the Star Alliance family allows SIA customers to enjoy coordinated schedules through codeshare arrangements By coordinating arrival and departure times Star Alliance member airlines have optimised connections within the network and reduced waiting times for our passengers This will help raise productivity level and reduces unit costs leading to a fall in average cost of production Internal DisEconomies of Scale Higher unit costs for a firm Cost of producing one unit of output when it expands its output or enlarges its scale of production Topic Sentence S An example of internal DisEconomies of Scale is Managerial diseconomies of scale As a firm gets excessively too large if will face with higher internal disEOS arising from large scale of production Elaboration of concepts When firm expands different experts to take charge of the different department coordination and communication problems arise due to the many levels and departments the firm has time lost and inefficiency in management managerial diseconomies of scale reputation negatively affected Elaboration using examples Managerial diseconomies of scale may arise for Indian Railway as seen from the major train breakdowns incidents recently whereby there is insufficient communication between various stakeholders and to the public due to weak command structure and evacuation procedures resulting in coordination problems when a firm is large or gets larger Link to disEOS concepts This would lead to a fall in productivity and efficiciency in management Hence unit costs will rise and a reduction of profits margin earned Evaluative Comments that you may write in essay A natural monopoly is in the best position to reap economies of scale in the case of natural monopolies which can be found in transport markets such as railway service a huge amount of capital outlay is needed to lay build the railway tracks for instance This is an example of total fixed cost This means that Total Fixed Cost could take up a big proportion of the Total Cost As such under this type of situation the cost of production is minimised by having only one producer as large scale production enables the natural monopolist to reap large internal economies of scale leading to a downward sloping AC MC curve firm s MES occurs at a very high level of output and internal diseconomies of scale may set in at a very late stage MARKET FAILURE In 1994 the UK government decided to spend 12 million pounds to protect one river from industrial and sewage pollution to monitor building development along the river and protect property from flooding a Distinguish between private goods merit goods and public goods and discuss under which of these classifications river control and development should be placed b Discuss whether according to economic analysis government intervention can lead to a more efficient use of resources INTRODUCTION River control and development is an example of public good 10 15 Public Goods