WAEC Economics 2013 Theory — Question 5

Model answer

(a) Small scale production is production which does not require huge capital outlay; it results in a low level of output. Large scale production is production which requires a huge amount of capital and output level is always large. (b) Internal economies of large scale production are the cost-saving advantages which accrue to a firm as it increases its scale of production. They include: (i) Marketing economies — large firms purchase raw materials in bulk at low cost and spend less on transportation and advertisement per unit cost. (ii) Financial economies — large firms are more credit-worthy and can borrow at a lower interest rate, and can also sell shares to the public. (iii) Economies in Research and Development — large firms have enough resources to set up a research laboratory/department to improve product quality, introduce new products, or reduce the cost of production. (iv) Welfare economies — large firms have resources to provide welfare services for their workers, increasing labour efficiency and boosting output. (v) Managerial economies — large firms can afford the best managerial ability; managerial cost does not increase proportionately with output. (vi) Risk-bearing economies — large firms are able to withstand shocks and can spread their risk across many products.