Internal Economies

Definition: This situation describes the advantages of the firm making use of a lower average cost of production as it increases its size of output.

Types of Internal Economies are explained below

a) Administration

As a firm grows in size, it is possible to practise the functional specialisation, which will rise the efficiency and productivity and thus lower the cost of production.

b) Technical

There is technical/practical superiority as well as economic efficiency of large capital such as machinery over smaller ones as they usually consume lesser power/fuel and needs lesser attention.

c) Marketing

Large firms are able to make use of a substantial discount for bulk buying of the factor input as well as able to spread their advertising cost over the greater volume of sales thus decreasing their average cost of production.

d) Risk-spreading

The big firms can divide their risk by producing a variety of related products, getting their factor input from number of sources as well as targeting their product at the wider market.