Internal𒅌 and External Economies of Scale: A📖n Overview

An economy of scale is a microeconomic term that refers to factors driving production costs down while increasing the volume of output. There are two types of 澳洲幸运5开奖号码历史查询:economies of scale: internal and external economies of scale.

Internal economies of scale are firm-specific—or🌳 caused internally—while external economies of scale occur based on larger changes outside the firm. Both result in declining m𝔉arginal costs of production, yet the net effect is the same.

Economist Alfred Marshall first differentiated between internal and external economies of scale. He suggested broad declines in the 澳洲幸运5开奖号码历史查询:factors of production—such as land, labor, and effective capital—represented a positive 澳洲幸运5开奖号码历史查询:externality for all firms. These externality arguments are offered in defense of public infrastructure projects or government research.

Internal Economies of Scale

An internal economy of scale measures a company's efficiency of production. That efficiency is attained as the company improves output when the average cost per product drops. This type of economy of scale is a consequence of a company's size and is controlled by its management teams such as workforce, production measures, and machinery. The factors, therefore, are independent of the entire industry.

There are several different kinds of internal economies of scale. Technical economies of scale are achieved through the use of large-scale capital machines or production processes. The classic example of a technical internal economy of scale is Henry Ford's 澳洲幸运5开奖号码历史查询:assembly line.

Another type occurs when firms purchase in bulk and receive discounts for their large purchases or a lower cost per unit of input. Cuts in administrative cost𒊎s can cause marginal productivity to decline, resulting in economies of scale.

External Economies of Scale

External economies of scale are generally described as ha💧ving an effec𒆙t on the whole industry. So when the industry grows, the average costs of business drop. External economies of scale can happen because of positive and negative externalities.

Positive externalities include a trained or specialized workforce, relationships between suppliers, and/or more innovation. Negative onꦐes happen at the industry levels and are often called external diseconomies.

There are several contributing factors behind external economies of scale. When competing companie🌟s set up 🦋shop in one area, specialized workers will seek employment. An example of this would be the IT industry in Silicon Valley, which has attracted a special set of skilled workers.

Secondly, certain industries may become so important that they can develop bargaining power with politicians and local governments. This, in turn, can lead to more favorable treatment in the form of subsidies or other concessions. 🌌The oil industry has a long history of subsidies in the United States, which were historically givenಞ to continue a steady flow of domestic supply.

Special Considerations

Internal economies of scale offer greater 澳洲幸运5开奖号码历史查询:competitive advantages than external economies of scale. This is b🐠ecause an ext💜ernal economy of scale tends to be shared among competitor firms. The invention of the automobile or the Internet helped producers of all kinds.

If borrowing costs decline across the entire economy because the government is engaged in 澳洲幸运5开奖号码历史查询:expansionary monetary policy, the lower rates can be captured by multipꩲle firms.

This does not mean any external economy of scale is a wash. Companies can still take relatively greater or lesser advantage of external economies of scale. Nevertheless, internal economies of scale embody ✨a greater degree of exclusivity.

The Bottom Line

Economies of scale allow a firm to reduce the unit cost per item while simultaneously increasing output. This benefits a com🙈pany because the more they produce, the less the cost is to produce an item. If a company can then sell all of the increased output, they are significantly improving the revenue🌠s they take in.

Economies of scale can be achieved either through internal efforts or external factors. Internal economies of scale are actions taken by a company that improve efficiency whereas external economies of scale are those externalities that affect the entire industry and occur outside of the firm.