2 Explain the concept of scale economies Explain the differe

2. Explain the concept of scale economies. Explain the difference between internal and external scale economies. What pattern of trade do we expect to see in industries with substantial external scale economies?

Solution

The scale economies, or Economies of Scale, occur when more units of a good or a service are produced on a larger scale, but with fewer input costs. This means that as output expands and companies become larger and larger, their economic costs fall.

There are two types of economies of scale - internal and external.

Internal economies of scale are internal to a company and controllable by the management. It results from.the sheer size of the company, and has no relation to the market and industry size. For example. Technological progress within the organization.

On the other hand, external economies of scale occur due to external factors, say preferential treatment by the government etc. Here, the cost per unit of output depends upon the size of the industry.

In the case of trade based on external economies, the pattern of trade is determined by history and accidents.

For example, countries that start as large producers in certain industries tend to remain large producers even if another country could potentially produce more cheaply.