IGCSE Economics Paper-2: Specimen Questions with Answers 55 - 56 of 100

Passage

The cost of production of a firm decreases as the business expands.

Question 55 (4 of 5 Based on Passage)

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Short Answer▾

Differentiate between internal and external economies of scale.

Explanation

Internal Economies and External Economies
S. No.Internal EconomiesExternal Economies
1.Internal economies refer to the expansion of the firm itself.External economies refer to the expansion of the industry.
2.Internal economies help in lowering the cost of production.External economies benefit most or all the companies.
3.The range of economies is such as economic, technical, financial, etc.External economies help in explaining the reason behind the growth of the economy.
4.Efficiencies from the larger scale of production in a firm.Agglomeration economies are equally important.

Question 56 (5 of 5 Based on Passage)

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Short Answer▾

Why some firms would benefit in small scale production

Explanation

Some firms benefit from small scale production because:

  • Time commitment: In a new business it may consume a lot of time of the entrepreneur in the initial stages as there are very few employees so all the decision has work and decision making must be done by the owner himself.
  • Risk: Risk cannot be eliminated from the business. Though a business structure may be designed to minimize risk and liabilities but still after some extent risk must be borne by the owner himself.
  • Uncertainty: external factors of the business are uncertain and cannot be predicted beforehand like- New competitors entering the market, change in the demand of the consumers. Even if the entrepreneur has planned everything still, he might not be able to foresee all the uncertainties.
  • Financial commitment: Many people starting their own business for their initial investment use their own personal savings. Commitment of savings may lead them with no money for their personal use. In some cases, the entrepreneur takes loan against some security which can be his house or any other personal asset.

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