External Economies of Scale. External EoS occurs when an industry grows and its long-run average costs fall.
All firms benefit from the growth in the industry, every firm experiences a downward shift in their LRAC curve. At each level of output, average costs are lower.
Examples of External Economies of Scale
Many factors cause external economies of scale:
⦁ Technological Improvement/Research and Development (R&D). Maybe new and more efficient technology becomes available to the industry due to R&D, so productivity rises and unit costs fall.
⦁ Taxation. The government could decrease taxes on the industry, so costs fall.
⦁ Labour Productivity (Education). Maybe educational institutions train more students and train them better. Workers’ skills improve, so productivity rises and unit labour costs fall. Also, firms’ training costs fall.
⦁ Infrastructure. Maybe the industry’s local infrastructure (roads and telecommunications) improves, so productivity rises and costs fall.