External economies of scale (EES) are the business-enhancing factors that affect firms in the same industry but are external from each individual firm. They are market-wide phenomena that help firms improve their economic performance, resulting in lower production and operating costs. The sources of EES can either come from scale of production, density of population, or infrastructure specialization.
In terms of scale of production, firms benefit from lower costs of inputs and higher quality of production when production increases in the same industry. This leads to lower costs for each individual firm. Density of population is another element that could drive external economies of scale. When the size of a market increases, firms can access specialized resources that were not available before due to economies of agglomeration. The increased population also leads to innovation and higher productivity in the industry. In addition, firms may be able to benefit from a greater presence of their customer base and increased competition.
The third source of external economies of scale is infrastructure specialization. By utilizing specialized infrastructure, firms improve the efficiency of their production and lower their costs. This could range from the use of efficient transportation systems to the use of an R&D center with the right resources and capabilities to help a firm develop new products and services.
These external economies of scale could be both beneficial and detrimental to a firm. It can give them an edge if they are able to leverage it more effectively than their competitors and the negative consequence of this is that the competitive edge could be lost if the external economies of scale are not exclusive to them. Furthermore, outside factors like government policies and economic stability may also influence the way firms benefit from EES. As such, firms should regularly assess their competitive position in the market by studying their external environment carefully.
Overall, external economies of scale create numerous opportunities for businesses to reduce their production and variable costs. Companies in the same industry benefit from lower costs of inputs and higher quality of products. They must constantly assess the current business environment to benefit from these economies of scale and to maintain their competitive edge.
In terms of scale of production, firms benefit from lower costs of inputs and higher quality of production when production increases in the same industry. This leads to lower costs for each individual firm. Density of population is another element that could drive external economies of scale. When the size of a market increases, firms can access specialized resources that were not available before due to economies of agglomeration. The increased population also leads to innovation and higher productivity in the industry. In addition, firms may be able to benefit from a greater presence of their customer base and increased competition.
The third source of external economies of scale is infrastructure specialization. By utilizing specialized infrastructure, firms improve the efficiency of their production and lower their costs. This could range from the use of efficient transportation systems to the use of an R&D center with the right resources and capabilities to help a firm develop new products and services.
These external economies of scale could be both beneficial and detrimental to a firm. It can give them an edge if they are able to leverage it more effectively than their competitors and the negative consequence of this is that the competitive edge could be lost if the external economies of scale are not exclusive to them. Furthermore, outside factors like government policies and economic stability may also influence the way firms benefit from EES. As such, firms should regularly assess their competitive position in the market by studying their external environment carefully.
Overall, external economies of scale create numerous opportunities for businesses to reduce their production and variable costs. Companies in the same industry benefit from lower costs of inputs and higher quality of products. They must constantly assess the current business environment to benefit from these economies of scale and to maintain their competitive edge.