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External economies of scale

External economies of scale refer to cost advantages that a firm can receive due to external factors, rather than factors internal to the firm. These cost advantages can allow a firm to produce goods or services more efficiently, leading to lower production costs and potentially higher profits.

Some examples of external economies of scale include:

  1. Infrastructure: A firm may benefit from external economies of scale if it is located in an area with well-developed infrastructure, such as roads, ports, and airports, which can reduce the cost of transportation and logistics.
  2. Skilled labour: A firm may benefit from access to a pool of skilled labor in a particular region, which can reduce the cost of hiring and training employees.
  3. Research and development: A firm may benefit from external economies of scale if it is located in an area with a strong research and development ecosystem, which can provide access to new technologies and knowledge that can be used to improve the firm's products or processes. Links with the research departments of local colleges and universities can be important.
  4. Suppliers: A firm may benefit from external economies of scale if it is able to negotiate favorable terms with suppliers due to its large size or purchasing power. This can result in lower raw material costs, which can reduce the overall cost of production.

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