3.3.3 External Economies Of Scale

Question 1

What are external economies of scale?

Answer 1

• external economies of scale occur when the cost advantages of producing a good or service extend beyond an individual firm and benefit multiple firms within a specific industry or geographical area

Question 2

What are some examples of external economies of scale?

Answer 2

• improved infrastructure
• development of a skilled workforce
• supplier specialisation and efficiency
• technological advancements and knowledge spillovers
• cluster effects and networking benefits

Question 3

What are the reasons for external economies of scale?

Answer 3

• infrastructure economies: if an industry cluster develops in a specific geographic area, firms can benefit from shared infrastructure, such as transportation networks, utilities, and specialised services
• knowledge and labour pool: in certain regions, there might be a concentration of skilled workers and a strong knowledge-sharing environment. Firms in these regions can tap into a well-trained labour force and easily access industry-specific knowledge. Businesses can benefit from the research activities of local/ regional universities
• supplier networks: clusters of related businesses can lead to a strong supplier network. The automotive industry often sees this, as car manufacturers benefit from well-established networks of suppliers providing specialised components

Question 4

Real life examples of external economies of scale (worldwide)

Answer 4

• Silicon Valley, California - a region in San Francisco Bay Area known for its concentration of high-tech companies, startups, research institutions, and venture capital firms. The proximity of these entities fosters collaboration, knowledge sharing, and access to a highly skilled workforce
• Bangalore, India - has become a global IT hub. The city’s concentration of IT companies, educational institutions, and technology parks has fostered an environment of collaboration and innovation

Question 5

UK examples of external economies of scale

Answer 5

• Cambridge - technology and biotech: The city of Cambridge, particularly the area known as the “Cambridge Cluster” or “Silicon Fen”, is a hub for technology, biotech, and pharmaceutical companies
• Manchester - Creative and media industries: Manchester has a vibrant creative and media industry, with a focus on television, film, music, and digital media
• Sheffield - Advanced manufacturing: Sheffield has a tradition in advanced manufacturing in industries such as aerospace, steel, and engineering
• Dundee - has developed a notable presence in the video game sector with a cluster of highly successful computer games companies based there

Question 6

What do external economies of scale result from and what impact do they have on costs?

Answer 6

• they result from the expansion of the industry of which the business is a member
• they lower the unit costs for many firms/ all firms inside the market

Question 7

Give 3 examples of industries that are clustered in a particular region and which therefore give rise to external economies of scale

Answer 7

1. Silicon Valley, California - large pool of highly skilled workers, access to capital and a culture of innovation. These resources create a network effect (the presence of one firm can benefit others by attracting talent and investment, sharing knowledge and ideas, and creating spin-off businesses)
2. Napa Valley, California - wine industry is concentrated in the Napa Valley. The region benefits from a favourable climate, high-quality soil, and a culture of winemaking. The success of one winery benefits others by attracting talent, and investment
3. Aerospace industry in Toulouse, France - this is where Airbus has its headquarters and major production facilities. The region benefits from a large pool of skilled workers and a culture of aerospace innovation. Firms can collaborate and compete with one another to drive growth