External economies of scale
Topic: Production Function, Returns and Costs · NCERT: Beyond NCERT
Meaning
External economies of scale are cost savings a firm gets from the growth of its whole industry or cluster, not from its own growth. When many similar firms gather in one place, they share things that lower every firm's costs:
- nearby suppliers;
- a pool of skilled workers;
- infrastructure;
- the spread of know-how from firm to firm.
Alfred Marshall called such places "industrial districts". These economies explain why industries form clusters.
Example
A small knitwear unit in Tiruppur can easily find trained workers, dyeing units and buyers because the whole cluster is large. Other Indian examples are Surat (diamonds and textiles), Ludhiana (hosiery and bicycles), Moradabad (brassware), Sivakasi (fireworks and printing) and Bengaluru (IT).
Don't confuse with
- Internal economies of scale: come from the firm's own growth, such as bulk buying or large machines. A cluster's shared labour pool is external. A firm's bulk buying is internal.
Related concepts
- Long run average cost
- Long run marginal cost
- Economies of scale
- Internal economies of scale
- Diseconomies of scale
- Economies of scope
- Minimum efficient scale