External Economies of Scale for Group of Firms

External economies of scale refer to the benefits that a group of firms operating in the same industry or geographical area can enjoy as a result of their collective actions. These benefits arise from the external environment in which the firms operate and are not directly under the control of any individual firm. The following are some of the ways in which a group of firms can benefit from external economies of scale:

1. Shared Infrastructure: When a group of firms operate in the same industrial park or geographical area, they can share the same infrastructure such as roads, water supply, electricity, and communication networks. This reduces the cost of infrastructure for each firm, resulting in lower production costs.

2. Skilled Labor: A group of firms can benefit from external economies of scale by sharing skilled labor. For example, if a group of firms operate in the same area, they can attract a pool of skilled labor to the area, which can benefit all the firms in the area.

3. Knowledge Sharing: A group of firms can share knowledge and information, which can lead to innovation and increased competitiveness. For example, firms can collaborate on research and development projects, share marketing strategies, and exchange information on production processes.

4. Access to Suppliers: A group of firms can benefit from external economies of scale by having access to a larger pool of suppliers. This can result in lower input costs and better quality inputs.

5. Improved Infrastructure: A group of firms can benefit from external economies of scale by improving the infrastructure in the area. For example, if a group of firms invests in the construction of a port, all the firms in the area can benefit from the improved transportation infrastructure.

Conclusion

External economies of scale can benefit a group of firms in many ways. By sharing infrastructure, labor, knowledge, suppliers, and improving the infrastructure in the area, a group of firms can reduce their production costs, increase their competitiveness, and achieve economies of scale that would not be possible for individual firms.