External Economies of Scale Definition and Types with Examples

Fri, 10/19/2012 - 08:40 -- Umar Farooq

Definition of External Economies of Scale

External economies of scale are not related with the ability, skill, management, education and experience neither these are linked with a specific business. All the businesses enjoy these economies equally. These economies arise as a result of the expansion of the industry as a whole. For Example When industry expands machinery and raw material is available to all the firms at cheaper rates. New and better techniques of production are discovered. Better means of transportation and communication are available. Trained labor and facility of workshop are also available. By product industries, helping industries and research centers are established. Entry of the new firms enables the firms to produce their output at lower cost.

For example if a company invest in a transportation servicing an industry will lead to decrease in costs for a company working within the same industry.

Types of External Economies of Scale

Following are the types of external economies of scale

  1. Transportation and Communication
  2. Skilled Labour
  3. Facility of Workshop
  4. Helping Industry
  5. Research and Experiment
  6. Banking Facility

1. Transportation and Communication

Concentration of firms provides better communication system for all. Rail, road facilities become available to all, the transport system reduces cost.

2. Skilled Labor

With the concentration of firms skilled labour is available to all the firms because people living in the nearby areas get technical training.

3. Facility of Workshop

Concentration of firms provides incentive for the technical persons to establish their workshops and hence, all the firms benefit from these, because they need not to incur costs in establishing the workshops.

4. Helping Industry

This economy arises because of concentration of firms. In local industry it becomes possible to split up some of the processes which are taken over by specialist firms. For example in Faisalabad with the textile mills dying factories, designing centers, ginning factories and calendaring plants have been established.

5. Research and Experiment

In local industry, research and development are centralized. Each individual firm needs not to spend a separate amount on research and development. They benefit from common pool.

6. Banking Facility

The basic aim of a commercial bank is to maximize profits and for this they need deposits and provide credit to the traders, businessmen and Industrialists etc. In a localized industry or business centers bank opens their branches and all the firms benefit from banking and credit facility. The banking system helps in promoting trade and business.

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