Question

What are the transaction costs problems facing financial organizations? Explain how financial intermediaries can help reduce these problems.

Short answer

Economies of scale relate to the benefit of mass manufacturing or other business operations in lowering cost per unit by increasing production or other business activities without increasing costs.

Step-by-step solution

Introduction

Financial intermediaries are institutions or enterprises that operate as a middleman, accepting monies from the general public and then lending them to other businesses or individuals that need to borrow.

Explanation

Economiesofscalearethebenefitsofmassmanufacturingorotherbusinessoperationsthatlowerthecostperunitbyincreasingproductionorotherbusinessactivitieswithoutincreasingcosts.

Theemergenceoffinancialinstitutionsisduetoeconomiesofscale,whichreducetransactioncosts.

Financialinstitutionsarecriticaltothefunctioningofanyeconomy.

Some financial organizations provide a variety of transaction cost-cutting options.

Mutual funds, for example, benefit from economies of scale.