external economies of scale

Question 1

what does external EOS refer to?

Answer 1

• the cost savings enjoyed by the firm due to the expansion of the industry as a whole

Question 2

what effect does external EOS have on the LRAC curve?

Answer 2

• it causes the entire LRAC curve to shift downwards

Question 3

what are the 2 main sources of external EOS?

Answer 3

1. more firms entering the industry
2. sharing of infrastructure costs

Question 4

why does external EOS arise when more firms enter the industry [2]

Answer 4

• as more firms enter the industry, they collectively demand for factor inputs of the same kind
• the suppliers of these factor inputs now produce more units of these inputs, & hence enjoy internal EOS
• as part of the cost-savings of these suppliers are passed onto the firms in the industry buying those inputs,
• they all face lower COP on average, where their LRAC falls even if they did not alter their output

Question 5

how does sharing infrastructure costs generate external EOS?

Answer 5

• as having 1 firm in a particular industry means that any infrastructure must be built by the firm, assuming that government funding was not provided
• thus, the costs are borne by the firm
• hence, if more firms enter the same industry, the costs will be shared