What are internal economies of scale?

Internal economies of scale refer to the cost advantages that a firm experiences as it increases its production output. These advantages are derived from factors that are unique to the firm itself, such as improved efficiency, better utilization of resources, increased bargaining power with suppliers, and the ability to spread fixed costs over more units of production.

As a firm grows and expands its operations, it can often negotiate lower input prices due to bulk purchasing, invest in more efficient technologies, and employ specialized labor. These factors contribute to a decrease in the per-unit cost of production. The firm reaps the rewards of these cost savings as it scales up its operations, leading to increased competitiveness and potential higher profit margins.

The other choices refer to factors that do not specifically relate to the firm's internal operations and growth. For example, market competition might lead to cost benefits for an entire industry rather than individual firms, government subsidies can help firms reduce costs but do not stem from internal efficiencies, and outsourcing involves transferring production to external firms rather than enhancing internal efficiency. Therefore, the key feature of internal economies of scale is that they are directly linked to the growth and operational improvements of the firm itself.