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Firms: Types, Production and Costs: Question 8

Syllabus 3.4

Multiple choice 1 mark

GreenLeaf Foods is a food manufacturer that has grown into one of the largest producers in its country. Because it now orders flour, sugar and other raw materials in far larger quantities than before, its wholesalers now charge it a lower price per tonne for these ingredients than they charge smaller manufacturers.

Which type of internal economy of scale is GreenLeaf Foods experiencing?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Identify what has actually changed for GreenLeaf Foods

GreenLeaf Foods has grown large enough to order raw materials (flour, sugar and other ingredients) in far greater quantities than before. As a direct result, its wholesalers now charge it a lower price PER TONNE than they charge smaller manufacturers who order less.

Step 2: Apply the definitions of each type of internal economy of scale

  • Technical economy of scale: cost savings from using larger, more efficient machinery or production methods as output rises.
  • Financial economy of scale: cost savings from being able to borrow money more cheaply, for example at a lower interest rate, because a large firm is seen as lower-risk by lenders.
  • Purchasing (bulk-buying) economy of scale: cost savings from being able to negotiate a lower price per unit on raw materials because the firm now buys them in bulk.
  • Marketing economy of scale: cost savings from spreading a fixed advertising or marketing budget over a much larger volume of sales, lowering the marketing cost per unit sold.

Step 3: Match GreenLeaf Foods’ situation to the correct type

GreenLeaf Foods’ saving comes specifically from ordering larger QUANTITIES of raw materials, which lets it negotiate a lower price per tonne with its wholesalers. This is precisely a purchasing (bulk-buying) economy of scale. It has nothing to do with machinery, borrowing costs, or advertising.

Step 4: Rule out the other options

  • A (technical) would require the saving to come from bigger or better production machinery, not from a lower ingredients price.
  • B (financial) would require the saving to come from cheaper access to loans or credit, not from wholesaler pricing.
  • D (marketing) would require the saving to come from spreading advertising spend over more sales, not from ingredient prices.

Final answer

GreenLeaf Foods’ lower price per tonne of raw materials from buying in larger quantities is a purchasing (bulk-buying) economy of scale, option C.