Economies of Scale in the Long Run

• In the long run all production costs are variable
• In the long run, the scale of production can change (i.e. there are no fixed factor inputs)
• Economies of scale are the unit cost advantages from expanding the scale of production in the long run.
• These lower unit costs represent an improvement in long run productive efficiency and they can give a business a significant competitive advantage in a market.

What are internal economies of scale?

• Internal economies of scale are the unit cost advantages from a business expanding the scale of their production in the long run.

• Lower average costs represent an improvement in productive efficiency and can give a business a competitive advantage

• Economies of scale can also lead to lower prices and higher profits

• As long as the long run average cost curve is declining, then internal economies of scale Full screen being achieved

• Economies of scale apply to a single firm as it grows

Internal Economies of Scale (IEOS)

• Technical economies i.e. containerization
• Specialist capital machinery/ technology
• Purchasing economies (monopsony power)
• Large scale application of the division of labour
• Using specialist managers throughout the supply chain
• Financial economies e.g. lower interest rates-on loans
• Risk-bearing economies from diversification
• Network which helps to lower marketing costs

Internal economies of scale and LRAC

The shape of a firm's long run average cost curve depends on both the returns to scale of production (increasing, decreasing, constant) and also the effect of scale on the prices that a firm pays for its inputs e.g. there are potential gains from a firm having monopsony power

The extent of internal economies of scale will vary from industry to industry

In an industry where the minimum efficient scale is high relative to market demand, an industry is likely to be highly concentrated