In microeconomics, economies of scale are money-saving benefits companies obtain when production increases. This benefit occurs when the cost-per-unit decreases whilst the output manufactured increases.
Large enterprises have more significant cost benefits and a competitive edge than small companies because the cost per unit generally depends on how much the enterprise manufactures.
- Internal economies of scale arise from a company’s growth, leading to reduced average costs due to increased production, specialization, or technological advancements.
- External economies of scale occur outside a company, resulting from industry growth, regional specialization, or improved infrastructure.
- Both types contribute to improved efficiency and cost savings, but the company controls internal economies of scale, while external factors influence external economies of scale.
Internal vs External Economies of Scale
The difference between internal and external economies of scale is that internal economies of scale are the benefits of the growth of a specific firm they are associated with. In contrast, external economies of scale are the benefits that arise when numerous firms are in the industry.
Alfred Marshall, a well-known economist, was the first to discriminate between the two types of economies of scale a company could achieve and termed them internal and external economies of scale.
Contrarily, external economies of scale refer to the outside factors that affect the whole industry.
|Parameter of Comparison||Internal economies of scale||External economies of scale|
|Meaning||Occur when there is an increase in the production or the size of the plant.||Occur outside the organization and result in a massive number of growing organizations.|
|Reflected||Reflected as a movement along the LAC curve.||It is reflected as a shift in the LAC curve.|
|The long-run average cost curve||This result in a fall of the long-run average cost curve because the firm’s output increases to a definite extent.||Results shift downward due to the growth in the industry’s size to a definite extent.|
|Benefits||Reduce the long-term costs, which helps the organization to upgrade the competition in markets globally.||Help the organization grow in size as it becomes slightly less exposable to external threats.|
|Caused||Based on specific changes caused internally.||Mostly produced externally, they are based on massive changes in a firm.|
What is Internal Economies of Scale?
Internal economies of scale estimate the firm’s productivity and efficiency, which can be accomplished by increasing the output when the average cost of the product falls. There are six various types of internal economies of scale, and they include:
- Technical economies of scale refer to those internal economies of scale attained through development in the production process.
- Managerial economies of scale occur based on the employment of a practical/viable workforce.
- Marketing economies of scale occur when the firm advertises or markets its products.
What is External Economies of Scale?
External economies of scale are achieved partly by the company and partly by economic growth and development. There are four types of external economies of scale, and they include:
- Economies of scale arise when public infrastructure is put to profit in the industry.
- Specialization economies of scale occur when the workers focus on a specified industry because of its size.
Main Differences Between Internal and External Economies of Scale
- Internal economies of scale refer to the economies within or internal to the organization, resulting in increased output.
- Internal economies of scale can be reflected in the long-run average cost curve as the movement beside the curve.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.