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Difficulty: HardInternal and External Economies of Scale

When an entire manufacturing industry expands in a specific region, prompting municipal authorities to construct dedicated transport links that lower distribution costs for all firms in that cluster, individual businesses within the industry are benefiting from internal commercial economies of scale.

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Answer

The statement is False. Cost savings resulting from industry-wide growth, local concentration, and shared regional infrastructure are classified as external economies of scale, not internal commercial economies of scale.
The statement incorrectly classifies external economies of scale as internal commercial economies. Cost reductions arising from the expansion of an entire industry cluster and public infrastructure developments are shared across all industry participants, making them external economies of localization and concentration.

Step-by-Step Solution

1
Identify the source of expansion and cost reduction described in the stem.
The expansion occurs across the entire industry and region, leading to infrastructure improvements accessible to all participating firms.
Determining whether cost savings stem from firm-specific internal expansion or sector-wide growth is required to correctly categorize economies of scale.
2
Differentiate between internal and external economies of scale based on economic definitions.
Internal economies arise from an individual firm growing its own operational scale, whereas external economies stem from the growth, localization, and development of the entire industry.
Since the transport improvements benefit all local businesses due to industry clustering, the benefits are external to any single firm.
3
Evaluate the statement's specific classification.
The statement incorrectly labels external economies of concentration as internal commercial economies.
Internal commercial economies specifically refer to marketing, buying, and selling advantages (such as bulk purchasing discounts) achieved internally by a single expanding firm.

Key Concept

Internal versus External Economies of Scale
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Topics

Internal and External Economies of Scale

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