Internal Economies of Scale

Internal economies refer to a situation where, by actions of the business, they generate scale economics. Thus, with an increase in the volume of production, the cost of manufacturing an additional unit of merchandise decreases.

That is, internal economies are a type of economies of scale that originate in a company as an effect of the decisions of its management. These may be, for example, the acquisition of a new machine or the purchase of supplies in a larger volume.

This concept is the opposite of external economies of scale where all the competitors of a market gain efficiency in their processes by factors that they cannot control.

It should be noted that the economist Alfred Marshall He was the first to distinguish economies of scale by their origin, being able to be internal or external.

Factors that can generate internal economies

Among the factors that can generate internal economies, the following stand out:

  • Catering: The company acquires raw material in a larger volume to access discounts. In that way, the unit cost of production will decrease.
  • Specialization: By expanding, the firm can promote the training of its employees in a specific activity, where they will gain efficiency.
  • Change of supplier: By increasing the scale of the business, the company can obtain greater profits and invest, for example, in higher quality inputs that offer better performance. That is, with the change of supplier, a smaller amount of raw material will be required for each unit produced.
  • Access to capital: If the firm receives financing, it can make investments that allow it to increase the efficiency of its processes.
  • Innovation: The company can reduce the unit cost of production if it has discovered a new technology or method to manufacture its merchandise.

Example of Internal Economy

Imagine the case of a soft drink bottling company. With the passage of time, its machinery has been worn out and decides that it is time to renew it.

Then, the firm acquires more modern technology. Thus, not only will you write off the depreciated fixed asset, but you will obtain capital goods that will allow you to develop your processes in less time and using fewer inputs. Consequently, the unit cost of production is reduced.