Define the term 'external economies of scale'.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2020). The mark or mark type is shown in brackets.

1. [2] (a) A sound definition of 'external economies of scale' includes two of the following: Cost reductions or benefits associated with the expansion / growth / cost reduction; Result from external factors with an example such as infrastructure changes / supplier improvements / location advantages / being offered purchasing opportunities by suppliers; Benefits a business gets because of the environment / economy; Benefits achieved without any effort from the business / outside the control of the business.
2. [3] (b) Sound explanation of two internal economies of scale. Answers could include: Purchasing economies – suppliers will often offer substantial discounts for large orders (bulk buying). It is cheaper for suppliers to process and deliver one large order rather than several small ones. This makes the unit cost cheaper for the buying business. Technical economies – large firms more likely to produce enough products to justify installing machinery for flow production. The high capacity reduces the unit cost of production. Also, the purchase of expensive computer systems can be justified to support the high output of large firms. Financial economies – money can often be borrowed more easily from banks and at a lower interest rate by big businesses. Also, it is easier for a big business to raise finance by selling its shares on a stock exchange. Marketing economies – the cost of a sales force and promotional campaigns can be spread over a higher level of sales for a big firm so reducing the cost of marketing per unit of product sold. Managerial economies – large businesses can afford to hire specialist functional managers who operate their functional area more efficiently than non-specialist managers, thus reducing costs per unit. A valid answer to this question does not require a definition of economies of scale. Accept any other valid response.