A Level Economics AQA Practice Exam

What are external economies of scale?

1. Cost benefits for individual firms only

2. Cost benefits enjoyed by all firms in an industry

3. Cost disadvantages due to competition

4. Cost benefits that arise from lower input prices

The correct answer is: Cost benefits enjoyed by all firms in an industry

External economies of scale refer to the cost advantages that all firms within a particular industry experience as the industry size grows. This means that as the industry develops and more firms operate within it, various factors increase efficiency and reduce costs for all businesses involved, not just specific ones. Such benefits might arise from shared suppliers, improved infrastructure, and the availability of a skilled labor pool that emerges as more firms attract workers and resources to the area. For example, if several firms within a specific industry cluster together, they may collectively benefit from a specialized workforce, lower transportation costs due to localized supply chains, and access to shared services or resources, such as research and development facilities. The other options do not accurately capture the concept of external economies of scale. Individual cost benefits pertain only to specific firms rather than the industry as a whole, while competition generally refers to market dynamics that could lead to disadvantages, rather than the collective advantages conveyed through industry growth. Additionally, while lower input prices can be a component of scaling, they do not encompass the broader industry-wide benefits associated with external economies of scale.