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Economies of Scale in Large Farms

Farms in the USA are getting larger. One dairy farm in the state of Indiana has over 38 000 cows. Farms in the USA compete with farms in both developed and developing countries. The value of the farms’ exports of milk appears in the trade in goods section of the current account of the USA’s balance of payments

Analyse the economies of scale from which a farm may benefit.

Category:

Market Structures and Competition

[CIE O level May 2018]

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Answer


Step 1 : Define' economies of scale' in the introduction.

Economies of scale occur when increasing output leads to lower long-run average costs. A farm will be able to benefit from economies of scale as it increases in size.


Step 2 : Analyse the various economies of scale from which a farm may benefit.

There are several economies of scale a farm may benefit.

➤ 2.1 As farms increase in scale, they increase their purchasing power with suppliers.

Through bulk buying, they are able to purchase inputs more cheaply, so reducing average costs. A farm can benefit purchasing economies for example by buying seed in bulk at a reduced price

➤ 2.2 A farm can benefit from technical economies of scale.

A farm grows, it will be able to purchase and use up to date and efficient equipment e.g. combine harvesters. Technical economies of scale will enable farms to gain advantages directly in the production process. Some production techniques only become viable beyond a certain level of output.

➤ 2.3 A farm can benefit from managerial economies.

As a farm grows, it will be able to employ specialist workers e.g. farm managers. In largescale firms, these come about as a result of specialisation. Experts can be hired to manage operations, finance, human resources, sales, logistics and so on.

➤ 2.4 Farms may benefit from financial economies of scale.

For example, as a firm grows, it may benefit from borrowing at a lower rate of interest or find it easier to obtain a loan. Large-scale firms usually have better and cheaper access to borrowed funds than smaller firms. This is because of the perceived risk to the lender is lower

➤ 2.5 As a farm grows, it may benefit from risk-bearing economies.

For example’ a farm may grow a variety of crops and if the yield of one crop is poor during a year, the farm may still earn revenue from other crops. As farms get larger, they become more risk-averse by spreading their activities in a more diversified way.

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