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External Economies of Scale

External Economies of Scale

These are advantages or benefits gained by a firm, as the industry in which it operates grows larger. These are cost-saving advantages derived by a firm as a result of its being sited in an area where there is a concentration of other firms or industries. These advantages manifest in:

(i) Economies of Skilled Labour:

This involves upgrading the skills of labour through the provision of education and training facilities in a well organised industry. This ensures that education and training of labour do not become part of the industry’s operations but rather some specialized institutions take over the performance of these functions. This is often easier in well-organised ones. Such education and training culminate in economies of manpower development and generally lower the cost of production in the industry.

(ii) Economies of Research and Development:

Another advantage enjoyed by firms in a well-organised industry relates to research and development activities. The industry or other institutions may provide these research activities with the result being made available to all firms in that industry. This lowers per unit cost of output produced in the industry.

(iii) Economies of Common Services:

Through the concentration of firms in a given geographical location, the firms may enjoy certain common services. These services include special transport and telecommunication facilities, water, power, good roads as well as special treatment from bankers. Also, a well-organised industry may enjoy excellent marketing arrangements through which it can buy raw materials and sell finished products. All these lead to a lower per unit cost of output in the industry.

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