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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Production

A cement company in Rajasthan finds that, because it buys limestone and coal in very large lots, suppliers give it a lower price per tonne than they give smaller rivals. Which type of internal economy of scale does this illustrate?

This is a purchasing or buying economy of scale. A large firm that buys raw materials in bulk obtains discounts and better terms from suppliers, which lowers its average cost per unit. The saving comes from input prices, not from machinery, selling or diversification.

  1. ATechnical economy
  2. BMarketing economy
  3. CPurchasing (buying) economyCorrect
  4. DRisk-bearing economy

Explanation

Lower input prices obtained through bulk buying are a purchasing or buying economy, a commercial internal economy. Technical economies arise from the production process and machinery, not from supplier discounts. Marketing economies relate to selling and advertising costs, and risk-bearing economies relate to diversification.

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