External economies due to increasing returns to scale

Definition: External economies refer to the benefits that are enjoyed by an entire industry or region as a result of the growth of a particular firm or industry.

Increasing returns to scale: Increasing returns to scale occur when the increase in the quantity of inputs used in production results in a more than proportionate increase in output. In other words, when a firm expands its production, its cost per unit of output decreases, and it becomes more efficient.

Explanation: When there is increasing returns to scale, the cost per unit of output decreases as the industry expands. This means that as the industry grows, the cost of production for every firm in the industry decreases. This, in turn, benefits the entire industry, and every firm operating in it.

For example, if the automobile industry in a particular region grows, there will be an increase in the demand for auto parts and services. This would result in a decrease in the cost of production and an increase in efficiency for all firms that produce auto parts and services in that region. This decrease in cost and increase in efficiency would benefit not only the firms but also the consumers, who would be able to buy auto parts and services at a lower cost.

Conclusion: Therefore, external economies accrue due to increasing returns to scale. As the industry grows, the cost of production decreases, and efficiency increases, benefiting the entire industry, and every firm operating in it.

Option a is correct increasing returns to scale refers to increase of all the variables in a same proportion as there is requirement of a bulk of variables the cost of variables decreases which is an external economy not only this there will be many benefit due to external economies as production increases in a high scale which also reduces the cost per unit