Internal and external economies of scale

Overview

Recall questions on what separates the two, and on how specialist suppliers, a skilled labour pool and infrastructure create external economies.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What are internal economies of scale?

   Model answer

   Cost advantages that arise from the growth of the firm itself.

2. 2

   How do internal economies of scale differ from external economies of scale in terms of their source?

   Model answer

   Internal economies of scale arise from the growth of the firm itself, whereas external economies of scale arise from the growth of the industry or external factors outside the individual firm.

3. 3

   Why do internal economies of scale lead to lower average costs as a firm expands?

   Model answer

   As the firm grows, it can exploit cost advantages specific to its increased scale of production, spreading fixed costs over greater output and gaining efficiencies in areas such as purchasing, marketing, and production.

4. 4

   If a manufacturing company doubles its factory size and finds its average costs fall as a result, what type of economy of scale is this an example of?

   Model answer

   An internal economy of scale, because the cost reduction arises from the growth of the firm itself.

5. 5

   Define external economies of scale.

   Model answer

   Cost advantages that arise from the growth of the industry as a whole, benefiting all firms within it.

6. 6

   What happens to an individual firm's long-run average cost curve when it experiences internal economies of scale?

   Model answer

   The firm moves down along its long-run average cost curve as output rises; the curve itself does not shift.

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