Question

Why protect an industry could be beneficial or not beneficial in internal economies of scale? What examples of industries observe the phenomenon of internal economies of scale?

Answer 1

Internal economies of scale is when the average cost of production decreases as the industry produces more units of that particular good and the average cost per unit falls until there is maximum efficiency. Internal economies of scale can occur with the help of specialization through the division of labor, using better technology of production, having better access to credit at a low interest rate, etc.

If an industry is protected, it could be beneficial in internal economies of scale. If an industry is smaller in size and stays in the market for a short duration, the cost of producing its goods and services will be high. Mass production helps in reducing the average cost of production. So, if an industry suffers from foreign competition, protecting that particular industry can help that industry to stay in the market for a longer duration and produce more output which would be helpful in internal economies of scale.

Examples of industries who observe the phenomenon of internal economies of scale are in the electronic industry such as Apple, industries in the fast moving consumer goods sector such as Nestle, ecommerce sector such as Amazon, etc. The process of making an apple phone is divided into many parts where the design,manufacturing of hardware, assembling all the parts together is divided among workers. Hence there is division of labor in Apple. Nestle and Amazon has the bulk buying power i.e. they can buy large quantities from suppliers at a low price and hence reduce the input costs.