4.1.4.5 Internal and external economies of scale

internal EofS

when a single firm grows and, as it becomes bigger, its average costs fall

Purchasing economies buy in bulk, technical economies have better tech, large firm have lower cost per unit(spread fixed costs over many units of output)

causes of internal EofS

Amazon(bulk buys, advanced tech, spreads delivery costs over million of items sold) and Volkswagon(lower costs=> produce large scale=> invest on efficient production lines)

Application of internal economies of scale

gives big firms competitive advantage=> lower prices and higher profit margins / firms grows too much => DofS => inefficiences(communication)

Analyses of internal economies of scale

external economies of scale

when an entire industry grows in size and as a result, all firms in that industry benefit from lowers costs even if each firm does not grow

overall development of the industry from concentration of firms in one area, leading to a large pool of skilled workers, specialist suppliers, and knowledge sharing

what causes external economies of scale

Silicon valley in California where firms like Apple, Google, and Facebook all benefit from being in same region, car industry of Detroit, modern financial services in London

Application for external economies of scale

Make entire industries more efficient and competitive internationally => explain why some industries cluster geographically => benefits are shared widely so even small firms in large industry enjoy lower costs, unlike internal EofS

Analyses of External EofS