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Difficulty: EasyInternal and External Economies of Scale

External economies of scale refer to cost reductions enjoyed by a single firm as a direct result of expanding its own internal operations.

Answer: Answer

Answer

False. Cost reductions resulting directly from an individual firm's expansion are internal economies of scale, whereas external economies of scale result from the growth of the overall industry.
Cost reductions gained specifically from an individual firm expanding its own output or facilities are internal economies of scale. External economies occur when the overall industry grows, benefiting all member firms regardless of their individual size.

Step-by-Step Solution

1
Identify the source of the cost reduction described in the stem.
The stem describes cost reductions arising directly from an individual firm's expansion of its own operations.
Determining whether the cost reduction originates inside the firm or from the broader industry is the key to classification.
2
Classify the economy of scale based on commerce principles.
Cost reductions originating within an individual firm are internal economies of scale.
External economies of scale are external to the firm and accrue to all businesses in a expanding industry or centralized area.

Key Concept

Internal vs. External Economies of Scale
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Topics

Internal and External Economies of Scale

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