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Economies of scale are the advantages in average cost reductions that can be achieved through the growth of a plant, firm, or an entire industry. There are various different types of economies of scale, all of which can be grouped together into either internal or external. Internal economies occur within a plant or firm, and external economies are the consequence of the growth of the entire industry or region. Economies of scale are therefore the advantages of a growth. However, we must also consider the disadvantages of a growth (either internal or external), which are known as diseconomies of scale, in order to determine whether small firms derive benefit too. The statement claims that it is only large firms that benefit from economies of scale, but before we look into the accuracy of this statement, we must first define a large firm. This is difficult, but the most widely used measure of a firms' size is its number of employees. This of course causes its' own problems as industries differ as to how labor-intensive they are. However, for the purposes of this essay I would consider any firm that employs more than 20 people as a 'large' firm. Internal economies of scale can be split into two groups, those that advantage plants or factories, and those that benefit firms or offices. The advantages for plants and factories from internal economies come from; specialization, indivisibility, increased dimensions, the principle of multiples, by-products, linked processes, and stock economies. Specialisation is employing specialists to undertake particular tasks in the production process to make it more efficient. Both small and large firms alike would benefit from this expertise, but the difference to small firms may be greater. Indivisibility occurs because of modern technology that often means that machines can only operate efficiently on a large scale, which clearly only benefits larger firms. Increased dimensions is when a plant grows, the ratio of the increased...
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