External Economies of Scale


    External Economies of Scale

    External Economies of Scale: Positive externalities to firms as the Industry grows.

    • Labour: Industry grows may lead to a higher concentration of workers in the economy who have the skills to be employed – developed skills at other companies or been provided course training by government/colleges. This means that firms will have to spend less on training.
    • Ancillary & Commercial Services: An established industry, particularly if its growing, tends to attracts smaller firms trying to serve its needs. A wide range of commercial and support services can be offered. Specialist banking, insurance, marketing, waste disposal, maintenance, cleaning, components and distribution services are just some examples.
    • Co-operation: Firms are likely to engage in joint ventures, information is likely shared throughout the industry – journals and papers


    • Disintegration: Production is broken up so that more specialisation can take place. When an industry is concentrated in an area, firms might specialse in the production of one component then transport it to main assembly car plant


    Increased Market Power:

    • Customers: Product choice may become limited and monopoly my main price exploitation of consumers. Without competition firms aren’t forced to innovate and there’s less desire to create and research new products and technologies even if it would benefit the consumer.
    • Suppliers: Monopsony power over supplies allows price dictation – supermarkets and regulation after bullying suppliers into lower supply prices.

    Problems arising from Growth:

    Diseconomies of scale: If a business expands the scale of its operations beyond the minimum efficient scale, diseconomies of scale may result. This is where average costs rise as output rises. There a variety of sources of diseconomies of scale.

    • Internal Diseconomies of scale:
      • Communication – Difficulty in co-ordination and communicating throughout the firm
      • Motivation – Workers become minor; poor relations between staff and managers
      • Technical – Two smaller plants can often be more effective than one large plant; reducing dead time as well as removing construction issues.
    • External Diseconomies of scale: These may occur from overcrowding in industrial areas. The price of land, labour, services and materials might rise as firms compete by a limited amount. Congestion may lead to inefficiency as travelling workers and deliveries are delayed.

    Overtrading: When a firm tries to fund a large volume of new business without sufficient resources, as a result it will run out of cash and may collapse.


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