Solution:

Economies of Scale:

• Economies of scale, in microeconomics, refer to the cost advantages that a business obtains due to expansion. Some factors cause a producer's average cost per unit to fall as the scale of output is increased.

• "Economies of scale" is a long-run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. Diseconomies of scale are the opposite.

• The com-mon sources of economies of scale are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets), and technological (taking advantage of returns to scale in the production function).

• Each of these factors reduces the long-run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing.

• Economies of scale is a practical concept that is important for explaining real-world phenomena such as patterns of international trade, the number of firms in a market, and how firms get "too big to fail".

• The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for free trade policies, since some economies of scale may require a larger market than is possible within a particular country - for example, it would not be efficient for Liechtenstein to have its carmaker if they would only sell to their local market.

• A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market. Economies of scale also play a role in a "natural monopoly."

• An economy of scale exists when larger output is associated with lower per-unit costs. Economies of scale have been classified by Marshall into Internal Economies and External Economies.

• Internal Economies are internal to the firm when it expands its size or increases its output. They "are open to single factory or a single firm independently of the action of other firms.

• They result from an increase in the scale of output of the firm, and cannot be achieved unless output increases. They are not the result of the invention of any kind, but are due to the use of known methods of production which a small firm does not find worthwhile."

• External Economies are external to a firm that is available to it when the output of the whole industry expands. They are "shared by several firms or industries when the scale of production in any industry or group of industries increases. They are not monopolized by a single firm when it grows in size, but are conferred on it when some other firms grow large".

• Modern economists distinguish economies of scale in terms of real and pecuniary internal and external economies.

• Real Internal economies are "associated with a reduction in the physical quantity of inputs, raw materials, various types of labor, and various types of capital (fixed or circulating) used by a large firm.