Business – 9.1 Location and scale – Scale of operations | e-Consult
9.1 Location and scale – Scale of operations (1 questions)
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Model Answer:
- Definition: External economies of scale arise when the overall cost per unit falls for all firms in an industry due to factors outside any single firm’s control.
- Example 1 – Skilled Labour Pool: A concentration of firms in a particular sector creates a local pool of specialised workers; each firm can hire trained staff more easily and at lower recruitment costs.
- Example 2 – Supplier Clustering: When many firms locate near each other, suppliers set up nearby, reducing transportation costs and lead times for all firms in the cluster.
- Reason for Industry‑wide Benefit: These external factors improve the operating environment for every firm, so the average cost reduction is not tied to the size of any individual firm.