1.

Define economies of scales and diseconomies of scales

Economies of scale is a savings cost gained by an increased level of production. Economies of

scale also arise when unit costs fall and production output increases. While diseconomies of
scale happen when a company or a business grows so large that the cost per unit will increase.
Thus, this means that diseconomies scale occur when the expansion of output will lead to
increasing average unit costs.

2. Differentiate the internal economies of scale and external economies of scale. Give one [1]
example for each category.

Internal economies of scale arise from the increased output of the business itself. This means to
measure a company’s efficiency of production and occur because of factors controlled by its
management team. While external economies of scale occur larger changes within the industry.
So when the industry grows, the average cost of business will drop. An example for internal
economies of scale is buying economies like buying in greater quantities. This will lead to lower
prices or as known as bulk buying. While an example of external economies of scale is
relocation of suppliers to the center of production will bring a cost saving.

3.

Internal economies of scale External economies of scale

Expansion of the firm itself Expansion of the industry

Lowers long run average cost (LRAC) Benefits most firms

Efficiencies from larger scale production Agglomeration economies are increasingly

important

Range of economies Helps to explain the rapid growth of many

cities

4. Short note for video 06.

● A young man made his own sandwich from scratch that cost him $1500.
● He grew the vegetables, gathered salt from seawater, milked a cow, turned the milk into
cheese, pickled a cucumber in a jar, ground his own flour from wheat to make the bread,
collected his own honey, and personally killed a chicken for its meat.
● The transportation he used was also by himself. He used air transportation to get to the
ocean to gather salt. He noticed why his sandwich is more expensive compared to
sandwiches at the market that only cost 2 pounds.
● The production cost of a product can be a lot cheaper when there is a mass production
of the product.
● The higher the level of production, the advantage of producing more grows smaller.
● Every single ingredient that the man used could have benefited from the principles of
mass production.