3. Briefly explain the differe

3. Briefly explain the difference between external and internaleconomies of scale. Why is it that if an industry is operatingunder conditions of internal scale economies then we cannot haveperfect competition?

4. State one factor which may lead to external economies ofscale.



Economies of scale is a phenomenon of reducing cost per unitoutput by expanding the scale of production. There are two types ofeconomies of scale; internal economies of scale are firm-specificand occurs when the productivity of firm increases leads todecrease in average cost while external economies of scale can bedue to various positive and negative externalities which affect theentire industry and cause average cost of production to fall. Anindustry which operates under internal scale economies would neverbe under perfect competition because the former lead to comparativeadvantage among firms where some firms can be more productive thanothers hence does not remain identical which is one of theassumptions under perfect competition.


There are numerous factors which cause external economies ofscale for example when competing firms are set up in the same arearequires specialized workers would lead to decrease in cost ofproduction as better training and innovation would scale productionand more workers would be employed in different tasks.

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