Question

Explain how economies of scale enhance the ability of financial intermediaries to transfer funds from savers to borrowers. Provide an example or link to a relevant article to illustrate your ideas.

Answer 1

ECONOMIC OF SCALE

Economic of scale occurs when the cost of units falls as output increases.Economic of scale are the cost advantage that a firm can exploit by expanding their scale of production and reduce the average cost of production.

IMPACT OF ECONOMIC OF SCALE ON FINANCIAL INTERMEDIARIES.

· Economic of scale helps in reduction of transaction cost a fee charged by bank,commission for broker,agent etc.

· Mutual funds gain more advantage due to the impact of economic of scale due to the lower commission.

· Economic of scale helps the bank to keep the transaction cost low.

· Economic of scale helps the financial institution in making huge transaction with corresponding less cost.

· Mainly,Economic of scale helps the financial intermediaries to reduce the cost of borrowing and lending money from the savers to borrowers.