A Level Economics AQA Practice Exam

Which situation would likely yield the greatest financial economies of scale?

1. A small firm in a niche market

2. A large corporation with widespread operations

3. A startup with limited funding

4. A mid-sized firm facing high competition

The correct answer is: A large corporation with widespread operations

The situation that would likely yield the greatest financial economies of scale is one involving a large corporation with widespread operations. Financial economies of scale refer to the cost advantages that a business obtains due to its scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output. In a large corporation, widespread operations allow for significant bulk purchasing of raw materials, which can lower per-unit costs. Such firms often have better access to credit and financial markets due to their size and established reputation, leading to lower interest rates on loans. This allows them to finance their operations more effectively and at a lower cost compared to smaller firms. Additionally, large corporations can invest in advanced technology and processes that improve efficiency and reduce operational costs, further enhancing their financial economies of scale. This contrasts with smaller firms, which may lack the resources or leverage to negotiate favorable terms with suppliers and lenders, thereby experiencing higher costs per unit. Thus, the large corporation's competitive edge in these areas helps it achieve and maximize financial economies of scale more effectively than the other options presented.