A Level Economics AQA Practice Exam

What do internal economies of scale refer to?

1. The benefits that all firms enjoy when they expand

2. The cost benefits that an individual firm can enjoy when it expands

3. Reductions in costs due to competition

4. The costs that are fixed for all production levels

The correct answer is: The cost benefits that an individual firm can enjoy when it expands

Internal economies of scale refer specifically to the cost advantages that a single firm experiences as it increases its production. When a firm scales up its operations, it can spread fixed costs over a larger output, negotiate bulk purchase discounts, utilize more efficient production techniques, and take advantage of specialized labor and equipment. These factors lead to a reduction in the average cost per unit of production for that individual firm. For instance, as production increases, a factory might run more efficiently, leading to lower variable costs, or a large firm might invest in advanced technology that a smaller firm cannot afford, which enhances productivity. This differentiation is key to understanding internal economies of scale, as it focuses on the advantages derived from within the firm's own operations rather than benefits that might be widespread across the industry or market.