Question

How do economies of scale impact trade? What are the different types of economies of scale?

Answer 1

ECONOMIES OF SCALE

Economies of Scale refer to the cost advantage experienced by a firm when it increases its level of output. The advantage arises due to the inverse relationship between per-unit fixed cost and the quantity produced. The greater the quantity of output produced, the lower the per-unit fixed cost.

means that production at a larger scale (more output) can be achieved at a lower cost (i.e., with economies or savings). ... Economies of scale can provide an answer for this type of trade. Another feature of international trade that remains unexplained with classical models is the phenomenon of intra industry trade.

A second broad reason that intra-industry trade between similar nations produces economic gains involves economies of scale. The concept of economies of scale, as introduced in Cost and Industry Structure, means that as the scale of output goes up, average costs of production decline—at least up to a point.

When more units of a good or a service can be produced on a larger scale, yet with (on average) fewer input costs, economies of scale are said to be achieved. ... Just like there are economies of scale, dis economies of scale also exist. This occurs when production is less than in proportion to inputs.

The impact of economies of scale on consumer welfare can be measured in several ways. ... Lower prices cause an expansion of market demand and bring about an improvement in consumer welfare shown by an increase in consumer surplus.

TYPES

A. internal

B external

INTERNAL ECONOMIES OF SCALE

Internal economies of scale are related to the shift in average production costs for a business as it boosts its overall product output and the average cost per unit falls until maximum efficiency is attained. Economies & Diseconomies of Scale. ... Internal Economies of Scale - As a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more cheaply. As a firm increases its scale of production, the firm enjoys several economies named as internal economies. Basically, internal economies are those which are special to each firm

EXTERNAL ECONOMIES OF SCALE

External economies of scale occur outside of a firm but within an industry. For example investment in a better transport network servicing an industry will resulting in a decrease in costs for a company working within that industry. External economies depend upon external factors. These factors include the industry, geographic location, or government.