Internal Economies of Scale: Definition & Examples

Apart from external economies of scale that occur due to the business environment change, internal economies of scale are organization-specific.

Though, both, external and internal economies of scale decline the margins of production. Furthermore, internal economies of scale are mostly used by organizations that aim to improve the efficiency of production.

Internal economies of scale is a concept that, if narrowed down, we’ll receive four more ideas.

These are technical economies of scale, managerial economies of scale, marketing economies of scale, financial economies of scale, buying economies of scale, selling economies of scale, risk-bearing economies of scale and research and development economies of scale.

These are the precise concepts that give the edge to internal economies of scale over the external.

Moreover, Alfred Marshal was the man who showed the difference between these two concepts.

Examples of Internal Economies of Scale

Buying Economies of Scale – When businesses make large purchases or borrow a lot of money, unlike small purchases and loans, they get special discounts.

So, purchasing products in large amounts will decrease the cost of a single unit, which result in lower sum spent.

Selling Economies of Scale – Without a doubt, marketing is heavily linked with costs. For instance, promotional and advertising campaigns are one of the priciest things in business.

But mostly, these costs are fixed and if the organization decides to grow, from time to time, it can reduce the overall money spent on marketing.

Managerial Economies of Scale – While scaling up a business, the possibility of specializing in certain fields like HR and finance highly increases.

Moreover, the personnel that works in a large organization is more likely to have better qualifications and expertise, than small company employees.

Also, managerial economies of scale are efficient in terms of hiring new employees, because of the human capital management.

Financial Economies of Scale – Compared to large organizations, small companies face difficulties while trying to obtain finances.

Furthermore, the interest rate of loans are always in favor of large businesses because they’re more likely to pay them back with selling bonds.

On the other hand, small companies always had problems with reaching financial economies of scale, because credit limits and the organization size often prevent them from reaching favorable outcomes.

Research and Development Economies – Creating a department that encompasses research and development is something a large company can afford because it has the ability to reduce average costs per unit by creating effective and efficient tactics of productions, which will result in overall revenue rise.

Risk-Bearing Economies of Scale – One of the best parts of internal economies of scale is risk-bearing. When a company is large, it becomes possible to produce several products that may also be unrelated.

By this, I mean that if a certain product from your arsenal fails, the ability to shift to a new one is always possible.

For instance, Google manages several products like Gmail, search engine, Google Drive, Google AdSense, Android, etc.

If any of them fail, for example, let’s take Gmail (due to the newest events) it won’t be a disaster for Google because they still have several chains of income.

Technical Economies of Scale – Organizations that have large-scale production and greater manpower have the ability to achieve greater efficiency.

For instance, a large company can invest in development, mass production or job separation (if there’s a complex task to complete, it can be broken into smaller parts and then be done in a much simple way)

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