A Level Economics AQA Practice Exam

What is financial economies of scale primarily related to?

1. Lower unit costs of production

2. Better borrowing terms for larger firms

3. Access to skilled labor

4. Minimized marketing expenses

The correct answer is: Better borrowing terms for larger firms

Financial economies of scale primarily relate to better borrowing terms for larger firms. As companies grow in size, they often achieve financial economies of scale due to their perceived stability and lower risk from a lender's perspective. Larger firms typically have more assets and robust financial histories, allowing them to negotiate lower interest rates and more favorable loan conditions compared to smaller firms. These advantages in borrowing can lead to significant cost savings, thereby enhancing the firm’s overall financial efficiency and investment capabilities. While lower unit costs of production, access to skilled labor, and minimized marketing expenses are important aspects of a firm's overall efficiency and competitiveness, they do not specifically define financial economies of scale. Instead, these relate more directly to operational efficiencies and economies of scale in production, labor, and marketing strategies, respectively.