Internal Economies of Scale vs External Economies of Scale
What is Economies of Scale?
Economies of Scale is which the company grows bigger and better it will experience cost decreases along with the increase in its level of output. Simply the cost per unit of an individual item decreases when increasing the scale of production.
This is related to operational efficiencies and synergies as a result of an increase in the level of production. The simple meaning is that companies tend to do things more efficiently with increasing size.
Difference Between Internal Economies of Scale and External Economies of Scale
The Below Table Illustrates the Difference Between Internal Economies of Scale and External Economies of Scale
| Internal Economies of Scale | External Economies of Scale |
|---|---|
| Economies of scale which unique within the company | Economies of scales for the industry as a whole |
| Purely based on the outcomes and the unique capabilities of the company | Purely based on the external factors which common for the entire industry |
| Unit cost advantages for the business when expanding their scale of production | Unit cost advantages for the business from the advancement of their industry |
| Internal economies of scale occur inside the company (company-specific) | External economies of scale occur outside of the company but within an industry/location area |
| Typically occur in large companies | Usually, it is commonly applicable across all size of companies in the industry |
| Example 01: A company has a patent for their unique production technology, which leads to lower the average cost of production compared with similar competitors | Example 01: The average cost of raw material in the country gets lower, the cost of production will reduce on all similar companies that require this supply |
| Example 02: A production company had forward integrated with the distribution of their products by acquiring the largest distributor. This results in a decrease in sale price compared to their competitors | Example 02: IT services delivery industry grows larger with the cultural changes and technology advancements, then the demand for the individual company also grows |
| Example 03: Apparel manufacturing company had conducted successful research about using robotics for their production which none of the other competitors looked into. They have implemented it which results in lowering the unit cost of production | Example 03: Assume if Alaska state in The United States reduces its taxes to attract companies to the area that will provide the most jobs. Then the advantage applicable for all companies located in Alaska |
Comparison of Internal Economies of Scale and External Economies of Scale
- Internal economies of scale are unique within the company whereas external economies of scale apply to the industry as a whole.
- Internal economies of scale are purely based on the outcomes and the unique capabilities of the company whereas external economies of scale are purely based on the external factors which common for the entire industry.
- Internal economies of scale are typically the unit cost advantages for the company when expanding their scale of production whereas external economies of scale are typically the unit cost advantages for the company from the advancement of their industry.
Overview about Internal Economies of Scale
Internal economies of scale are unique within the company. It is purely based on the outcomes and the unique capabilities of the company. Those are typically the unit cost advantages for the company when expanding its scale of production.
Overview about External Economies of Scale
External economies of scale are apply to the industry as a whole. It is purely based on the external factors which common for the entire industry. Those are typically the unit cost advantages for the company from the advancement of their industry.
Further Explanation of Economies of Scale
The above diagram shows that if a company increases output from Q1 to Q2, the average cost decreases from C1 to C2. Economies of scale reduce both per-unit fixed cost and per-unit variable cost. The fixed cost gets spread over more output than before when production increases. Also, the variable cost gets deducted with the efficiency of the production process when expanding the scale of production. However, the total fixed cost of production will remain unchanged.
Diseconomies of Scale
The concept of diseconomies of scale is the reverse of economies of scale. Considering the diagram illustrated above. After the quantity of production increase beyond the level of 10,000 (Q2) the average cost per item increases. Enterprises’ experiences cost disadvantages due to an increase in organizational size or output. That will result in the production of goods and services at increased per-unit costs. As enterprises get larger the complexity drives in.
To read more about diseconomies of scale.
Recommended Articles:
1. Meaning of Economies of Scale?
2. Diagram illustrates Economies of Scale
3. Types of Internal Economies of Scale with Examples
4. Advantages and Disadvantages of Economies of Scale
5. Diseconomies of Scale with Examples
