Large firms in an industry have cost advantages over small firms in same industry. Explain the condition for this statement to be true.

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Larger firms have greater access to pools of resources. They can buy more goods in bulk provided that there is a demand for those goods once ready for sale. Larger firms can also deliver larger varieties of goods than smaller businesses. Some goods that do not sale as well can...

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Larger firms have greater access to pools of resources. They can buy more goods in bulk provided that there is a demand for those goods once ready for sale. Larger firms can also deliver larger varieties of goods than smaller businesses. Some goods that do not sale as well can be carried along with best-sellers—this gives larger businesses greater flexibility in deciding what to keep in stock. Smaller stores, on the other hand, have to keep as much of the business as profitable as possible.

Larger firms, especially established ones, are seen as more stable among investors. Investors often see small start-up ventures as being risky and will not seek to place too much of their portfolio in these small companies. Large firms, on the other hand, are often viewed as more stable and are more likely to receive investment.

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This is a fairly straightforward statement in general, but a few things make it more likely to be true. The concept in question is called economies of scale, and there are several things that make it work. The first is the quantity of orders—which a larger company should naturally have many more of than a smaller one. Because of a reduction in setup time and being able to buy the supplies for manufacture in bulk, the larger company can provide cheaper products.

Additionally, access to more money for technology and large quantity ordering helps a large company keep their prices low. The better the technology, the more able the company is to keep prices low because there will be faster production, lower maintenance, and higher output. Additionally, with large reserves of funding, they can fairly easily reach out and purchase large quantities to take advantage of their suppliers economies of scale.

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For large firms to have cost advantages over small firms, two conditions have to be met. First, the large firm should have more orders than the small firm. Second, the large firm should have better technology than the small firm. This phenomenon is also known as economies of scale.


If the large firm has a lot of orders, it can manufacture more goods at a cheaper price since the costs are evenly spread across the entire production process. Most large firms also have access to better production machines, which allows them to cut down on labor costs and produce more goods in a shorter time.


Economies of scale can also be influenced by the brand's name. Large companies are well known and trusted by suppliers. As a result, they have more bargaining power than small firms.

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The best way to explain this will be to provide an example. Let us consider Company A and Company B, who both manufacture shoes.

Company A is a large multinational firm, whereas Company B consists of a man and his son working in their basement.

When it's time to order soles for the shoes, Company A may order 10 000 soles, whereas Company B may only order 100 soles. Because they are buying so many more soles, Company A will get a much better price per sole from the supplier than Company B will. This, in turn, means that they will have to sell their shoes with a lower markup because the shoes cost Company A so much less to make, thanks to economies of scale.

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I think what you are asking about in this question is what is called economies of scale.  Economies of scale exist when large firms in an industry have lower costs per unit produced than small firms in that same industry have.

In order for economies of scale to occur, firms must experience high fixed costs even when they are small.  If fixed costs are high, large companies will experience economies of scale because they will be able to produce more per dollar of fixed costs -- the small firms will have very high average fixed costs while large firms have lower average fixed costs because they produce a larger number of units of their product.

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