Economics
External Economies of Scale
External economies of scale refer to the cost advantages that result from the overall growth of an industry or region, rather than from the expansion of a specific firm. These benefits can include improved infrastructure, a larger pool of skilled labor, and enhanced knowledge spillovers. As more firms locate in a particular area, they can collectively benefit from these external economies of scale.
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8 Key excerpts on "External Economies of Scale"
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
Though providing such facilities involves huge cost, yet the factory aims to increase the productive efficiency of the workers, through which it raises the production and cover these costs. The business expansion might even allow the firm to afford the sponsorship of sporting events and become popular among the customers. Such activities of a large firm also promote good customer relations and create a good impression in the eyes of the public. In due course, the firm benefits from increased sales. This ebook is exclusively for this university only. Cannot be resold/distributed. II. External Economies of Large Scale External Economies of Scale occur outside of a firm but within an industry. So, External Economies of Scale occur, when a firm benefits from lower unit costs as a result of the whole industry growing in size. That means, a firm may enjoy certain cost savings, not through its own expansion, but by being a part of a well-organized and large industry. So, external economies are shared by a number of firms, when the entire industry prospers. That means, the external economies are not monopolized by any single firm in the industry. So, the factors responsible for economies of large scale are external to firm and they not only influence the firm, but the whole industry. So, economies of scale of an industry refers to External economies. They accrue to a firm due to technological influences on the total output produced in the industry, which reduces per unit cost of production. So, all the firms in industry will develop due to technological interdependence of firms. The external economies include: Technical economies : This is related to division of labour and specialization. The supply of skilled labour may locate in the vicinity of the industry and this will cause firms in the industry to have an easy access to the type of labour they need at low costs.
eBook - PDFSurfing the Global Tide
Automotive Giants and How to Survive Them
- M. Wynn-Williams(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
This consideration of optimal size is a core theme of this book since economies of scale indicate the ideal plant size for a firm, and thereby the ideal size for the firm as a whole. Economies of scope exist when a large firm gains efficiency by more intensive use of its facilities. Although economies of scope are not pre- scriptive in structuring the firm, and therefore not core to this book, they do indicate where a firm might improve its sustainability. For example, the cost of selling an additional product through a shared distribution system might be less than for a rival selling the same product through a dedicated distribution system. The product itself can also benefit by sharing compo- nents or even the specialist knowledge in R&D. Overview of economies of scale Cairncross (1966, 106) described two different areas where scale may be found: external economies and internal economies. External economies occur when firms have grown large enough that the industry can support its own infrastructure, made up of, for example, specialist support and trained labor (Sloman 2001, 95). Cairncross (1966, 107) also included economies of concentration – where firms congregate in a single location, a tendency recently promoted by the growth of just-in-time (JIT) methods (Womack et al. 1990). Economies of concentration, then, inhibit geographic spread and promote vertical integration by introducing cost advantages when companies are in close proximity. The decision of a firm to integrate verti- cally or not will be examined in later chapters. The converse – economies of disintegration – concerns the breaking down of the production process into specialist functions that are better served by separate firms or even industries. This does not necessarily promote global spread but it does Surfing the global tide 22 enable it and suggests opportunities for divisibility within the production transformation process as a whole.
eBook - PDFOpen and Nimble
Finding Stable Growth in Small Economies
- Daniel Lederman, Justin T. Lesniak(Authors)
- 2018(Publication Date)
- World Bank(Publisher)
This is potentially important, given the key role of energy as an input for other industries. 2 There is more evidence for External Economies of Scale or agglomeration economies. It is thought that firms in a particular industry often cluster together (agglomeration) because there are External Economies of Scale. In theory, agglomeration results in enhanced efficiency due to labor market pool-ing, knowledge spillovers between firms, and reduced transport costs for send-ing goods to market. Rosenthal and Strange (2004) review the literature on agglomeration economies and find that most studies support the idea that knowledge sharing, labor market pooling, and reduced transportation costs are all important sources of benefits for firms that locate close to one another. Hanson (2001) finds evidence that agglomeration creates positive externalities. Specifically, he finds that wages increase in the presence of more educated workers in the local labor force, and long-run industry growth is higher in In Search of Scale Economies with International Data 21 Open and Nimble • http://dx.doi.org/10.1596/978-1-4648-1042-8 locations with more industrial activity. Finally, Ellison, Glaeser, and Kerr (2010) analyze agglomeration patterns by looking at common characteristics of industries that tend to locate next to each other. They find evidence that the three channels discussed above—knowledge sharing, labor market pooling, and reduced transportation costs—are important in explaining agglomeration. However, they find that the most important factor determining whether firms located together is their need for natural resource endowments. Regardless of the form they take, economies of scale are thought to be an important component in generating growth, and it is worth investigating whether there is evidence of scale economies at the country level.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 3 Economies of Scale As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. Economies of scale , in microeconomics, refers to the cost advantages that a business obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. Diseconomies of scale are the opposite. The common sources of economies of scale are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial ____________________ WORLD TECHNOLOGIES ____________________ instruments), marketing (spreading the cost of advertising over a greater range of output in media markets), and technological (taking advantage of returns to scale in the production function). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing. Economies of scale is a practical concept that is important for explaining real world phenomena such as patterns of international trade, the number of firms in a market, and how firms get too big to fail. The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for free trade policies, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 10 Economies of Scale As quantity of production increases from Q to Q2, the average cost of each unit decreases from C to C1. Economies of scale , in microeconomics, refers to the cost advantages that a business obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. Diseconomies of scale are the opposite. The common sources of economies of scale are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output ____________________ WORLD TECHNOLOGIES ____________________ in media markets), and technological (taking advantage of returns to scale in the production function). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. Economies of scale are also derived partially from learning by doing. Economies of scale is a practical concept that is important for explaining real world phenomena such as patterns of international trade, the number of firms in a market, and how firms get too big to fail. The exploitation of economies of scale helps explain why companies grow large in some industries. It is also a justification for free trade policies, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market.
eBook - PDF- Ronan Paddison(Author)
- 2000(Publication Date)
- SAGE Publications Ltd(Publisher)
In the external economy of scale approach firm output x is written as x = G ( N ) x ( k ) (1) where x (·) represents the firm’s own constant returns to scale technology, with a vector of private inputs, k . G ( N ) is a Hicks’s neutral shift factor external to the firm; its arguments are local scale measures such as total city workforce. With positive externalities G ′ > 0, indicating that as city scale rises, firm output rises, holding its own inputs fixed. That is the basis for urban agglom-eration for firms and hence workers. Hicks’s neutrality is not critical but empirical evidence suggests it holds (see below). With Hicks’s neutrality, the technology in equation (1) can be rewritten in terms of unit cost functions and profit functions as c = G ( N ) –1 c ( p ) (2) π = G ( N ) π ( p ) (3) where c is the firm’s unit cost of production, p is a vector of input and output prices, and c ( p ) repre-sents the firm’s constant returns to scale tech-nology. In equation (3), π is the firm’s profits; but now, while π ( p ) represents the firm’s technology, such technology must exhibit decreasing returns to scale (to, say, fixed entrepreneurial inputs) in order to be well behaved. Equation (3) can be used also to determine firm size, unlike (2), through the partial derivative with respect to output price. Use of (2) and (3) in empirical work is common, since all right-hand side arguments are exogenous variables to the competitive firms (for example, in particular, prices); while in (1) the vector k is endogenous, raising problems of simultaneity bias in estimation. There is strong empirical evidence on the exis-tence, nature and magnitude of agglomeration economies, reviewed later. However, the issue emerging in the 1980s concerned what really are the sources of these black-box External Economies of Scale – what are the micro-foundations? In thinking about that issue, early urban economists drew from Alfred Marshall, who wrote in 1890 15 Urban Scale Economies J.
- Arne Hallam(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
While economies of scale or size explain cost changes that occur as output expands, these may also be changes in cost due to the product mix chosen. If there are cost advantages from the production of several products simultaneously as contrasted with their production in separate firms or processes, then economies of scope are said to occur. A formal definition requires the specification of several subsets of M, the set of all products. LetS be a subset of M and let P be a non-trivial partition of S with an element of the partition denoted I,. The union of the I, is equal to the set S and the sets 4 and I, are nonintersecting for i -:~: j. Then economies of scope are said to exist' if k E G(YL·} > C(ys) i=1 J (48) For example, if M = {1,2} and P = [{1},{2}], then economies of scope exist when: • (49) The degree of scope economies provides a measure of this cost savings and is given by: (SO) 167 Overall returns to .scale are related to returns to scope and product specific returns to scale through the identity: aL 'VL + (1-al) 'I'M -L 'I'm.. 1-scL (51) There are two major sources of economies of scope. The most obvious is joint production which results from the presence of public inputs. Public inputs are those which can be used by one production process without reducing the amount available for other processes. An example might be the use of ponds for fish culture and providing watering for grazing animals. While exact public inputs are rare, quasi-public inputs are very common. Quasi-public inputs are those which can be shared by two production processes without complete congestion. The use of the same planting equipment for com and soybeans is a typical example since the demands do not typically occur at the same time. Many allocated fixed inputs in agriculture may lead to eConomies of scope. In agribusiness firms, economies of scope may exist in sales and advertising since sales efforts can promote more than one product or line.
eBook - ePubFloating World, The: Issues In International Trade Theory
Issues in International Trade Theory
- Wilfred J Ethier(Author)
- 2014(Publication Date)
- WSPC(Publisher)
Let me not push the case too strongly. As long as communication is not perfect mere propinquity must go for something. Add to this historical cultural barriers. Nevertheless, the assumption in what follows that (with free trade) decreasing costs are a function solely of world output need not rest entirely on the efficiency of a direct focus on the central concern of this paper.Some economies do require by their very nature that industry production be concentrated at a single place. Balassa (1967, ch. 5 ) refers to these as “economies of scale in the traditional sense” in contrast to ‘horizontal specialization’ and ‘vertical specialization,’ which he regards as more important and which correspond to the economies I have discussed above as due to the division of labor. I shall not treat such ‘traditional’ economies in what follows. These economies are specific to particular, narrowly-defined products whereas my analysis will be in terms of the usual two-sector, general-equilibrium approach. The very existence of these narrowly-defined products can itself be thought of as a consequence of economies of scale. Recall that, while discussing his pin factory, Smith noted that pin-making itself had been rendered a distinct trade by the division of labor. Furthermore, I do not think that explicit consideration of these economies would much influence what follows. The analysis can proceed on the assumption that all such economies are always fully exploited. This is because this paper will not depend upon a distinction between internal and external economies.Since Marshall, writers have assumed that economies of scale are external to the firm. Occasional deviants were severely taken to task, and much of the literature involved whether such economies exist, either logically5 or empirically. The reasons were the beliefs that the conclusions of the theory required perfect competition and that the latter was inconsistent with increasing returns internal to the firm.International economies and free entry do indeed imply that in equilibrium industry output will be concentrated in one firm. But costless entry will constrain that firm to choose efficient techniques and to sell at average cost – precisely how the industry would behave if the economies were external.6 There may be only one firm in existence, but potential competitors are what count, and costless entry means there are always plenty of these. However, in a two-sector economy with one sector a single firm, free entry appears far more stringent than in a world of many small competitors.7
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