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Economies of Scale in Large Farms

Question

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]

Preview 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

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