Economies of Scale

Statement

Economies of scale are the cost savings enjoyed by firms due to an expansion in their own scale of production (internal) or growth in the industry (external).

• Internal economies of scale — the fall in unit cost of production when a firm expands its own scale of production.
• External economies of scale — the fall in unit cost of production when the industry a firm belongs to experiences growth.

Notes

Economies of scale are what make the long-run average cost curve fall as output rises. Internal economies arise from the firm’s own growth and so accrue to that firm alone; external economies arise from the growth of the whole industry and so accrue to every firm in it. The specific sources of each are set out in sources of economies of scale, and their reversal at large scale is covered by diseconomies of scale. The output at which internal economies are exhausted is the minimum efficient scale.