Economies of scale refer to the cost advantage that a firm experiences as it increases its production output. This occurs because the average cost of production falls as the firm's output increases. There are two types of economies of scale: internal and external.
Internal economies of scale refer to cost savings that a firm experiences as a result of its own expansion. For example, a firm that increases its production output may be able to negotiate bulk discounts on raw materials, leading to cost savings. Additionally, as the firm increases its output, it may be able to spread fixed costs, such as the cost of machinery, over a larger number of units, leading to a fall in average production costs.
External economies of scale refer to cost savings that a firm experiences as a result of the expansion of other firms in the same industry. For example, if a number of firms in the same industry locate in the same area, the local economy may experience an increase in specialized labor and suppliers, leading to cost savings for all firms in the industry.
Diseconomies of scale refer to the increased costs that a firm experiences as it increases its production output. This occurs because the average cost of production rises as the firm's output increases. There are two types of diseconomies of scale: internal and external.
Internal diseconomies of scale refer to cost increases that a firm experiences as a result of its own expansion. For example, as a firm increases its production output, it may face difficulties in coordinating and managing its larger workforce, leading to increased costs. Additionally, as the firm becomes larger, it may become less flexible and less able to adapt to changes in the market, leading to increased costs.
External diseconomies of scale refer to cost increases that a firm experiences as a result of the expansion of other firms in the same industry. For example, if a number of firms in the same industry locate in the same area, the local economy may experience an increase in competition for resources such as labor and raw materials, leading to increased costs for all firms in the industry.
In conclusion, economies of scale refer to the cost savings that a firm experiences as it increases its production output, while diseconomies of scale refer to the increased costs that a firm experiences as it increases its production output. Both economies and diseconomies of scale can be internal or external, depending on whether they are a result of the firm's own expansion or the expansion of other firms in the industry.