EXTERNAL ECONOMIES - Skyline E-learning site

External economics, also known as external economies of scale, are benefits that arise for businesses and industries as a whole due to external factors, rather than from internal factors such as investments in technology or production processes. These benefits arise from the larger scale of economic activity and are enjoyed by all businesses in the industry, rather than just one or a few businesses. In this blog post, we’ll take a closer look at external economics, including their types, examples, and impact.

Types of External Economies:

There are several types of external economies of scale that can occur in an industry. Some of these include:

Localization Economies: This type of external economy occurs when several businesses in an industry are located in the same area, which can lead to lower costs for all businesses in the area. For example, a cluster of software companies in Silicon Valley benefits from a large pool of highly skilled labour, research institutions, and specialized suppliers.

Agglomeration Economies: Agglomeration economies arise when a group of businesses in an industry are located in the same area, resulting in benefits such as knowledge spillovers, shared services, and infrastructure improvements. For example, the financial industry in New York City benefits from access to a large pool of skilled labour, well-developed financial markets, and supporting services.
Informational Economies: Informational economies occur when businesses in an industry share information that can lead to cost reductions or improved efficiency. For example, businesses in the semiconductor industry share information about the design and manufacturing of microchips, which can lead to faster and more efficient production processes.

Examples of External Economics:

Some of the most common examples of external economies of scale include:

Skilled Labor: When a large pool of skilled labour is available in a particular area, it can lead to lower costs for businesses in that area, as well as improved efficiency and productivity. For example, the presence of universities, research institutions, and specialized training programs can lead to a skilled workforce in a particular area.
Infrastructure: When infrastructure such as roads, bridges, and airports is well-developed, it can lead to lower transportation costs for businesses and improved efficiency in the supply chain. For example, a well-developed transportation network in a particular area can reduce transportation costs for businesses and improve access to markets.
Knowledge Spillovers: When businesses in an industry share information, it can lead to faster innovation and improved efficiency. For example, companies in the biotechnology industry share information about research and development, which can lead to faster and more efficient drug development.

Impact of External Economics:

External economies of scale can have a significant impact on businesses and industries, as well as on the broader economy. Some of the key impacts of external economics include:

Improved Efficiency: External economies of scale can lead to improved efficiency in an industry, as businesses benefit from lower costs and shared services. This can lead to higher productivity, lower prices, and increased competitiveness.
Innovation: External economies of scale can also lead to innovation in an industry, as businesses benefit from shared knowledge and expertise. This can lead to the development of new products and services, as well as improvements in existing products and services.

Regional Development: External economies of scale can also have a positive impact on regional development, as businesses are attracted to areas that offer lower costs and improved efficiency. This can lead to the development of new businesses and industries, as well as the creation of new jobs.

In conclusion, external economies of scale are an important concept in economics, as they can have a significant impact on businesses, industries, and the broader economy. By understanding the different types of external economies and their impact, businesses can take advantage of these benefits to improve their efficiency and competitiveness.

EXTERNAL ECONOMICS AND EXTERNAL DIS-ECONOMIES
External economies are the benefits a firm derives from the concentration or localization of industries in a particular area. In other words, these are the benefits a firm enjoys from increase in its output and decrease in cost as a result of the kind of assistance it derives from other firms within the same location. External economies are mostly derived from industrial estates where there are many firms operating in the same location.

External diseconomies, on the other hand, refer to the disadvantages a firm experiences when the activities of one or more industries increase the cost of production or output of that firm within the same location.
The advantages and disadvantages of localization of industries is also applicable to external economies and diseconomies as discussed in previous chapters.