External Economies of Scale | tutor2u Economics
Study notes

External Economies of Scale

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

External economies of scale occur outside of a firm but within an industry.

External Economies of Scale - revision video

External economies of scale (EEoS)

  • 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
  • Investment in industry-related infrastructure including telecommunications can cut costs for all
  • Another example is the development of research and development facilities in local universities that several businesses in an area can benefit from
  • Likewise, the relocation of component suppliers and other support businesses close to the centre of manufacturing are also an external cost saving
  • Agglomeration economies may also result from the clustering of businesses in a distinct geographical location e.g. software in Silicon Valley or investment banks in the City of London
External economies of scale - analysis diagram

Case Studies in External Economies of Scale

Formula One

Britain has a history of providing a base for some of the most successful teams in Formula One. McLaren are based in Woking but Renault, Honda, Williams and Red Bull are all clustered in the east Midlands. Partly this is an accident of history - namely the availability of disused airfields after the war.

The cluster of F1 teams is a good example of the external economies of scale that can be generated when a group of producers develop and expand in a relatively small geographical area.

Most of the teams currently racing are based in the UK, along with their R&D operations. A whole network of industries, such as component suppliers, engineering and design firms, have sprung up in Britain, mostly in central England, to serve the sport both here and abroad. F1 also helps to support a far larger motorsport industry in the UK, for example rally car racing and all its associated industries.

Estimates of the total number of jobs dependent on motorsport in the UK vary between 45,000 and 110,000. Geoff Goddard, professor in Motorsport Engineering Design at Oxford Brookes University, estimates that it accounts for 1 per cent of GDP, not insignificant when compared to car manufacturers, which represent about 5 per cent.

Science Cities

Science cities are knowledge clusters that bring together higher education expertise and entrepreneurial zeal. Their number continues to grow from California and Boston in the USA, Cambridge in the UK, Education City in Qatar, Science City in Zurich and Digital Media City in Seoul.

In London there is much excitement about Tech City, an area around Shoreditch and Old Street in east London which is home to a growing number of technology digital and creative companies. It is also known as Silicon Roundabout and recent estimates suggest there are 3,200 firms in the area employing some 48,000 people.

Subscribe to email updates from tutor2u Economics

Join 1000s of fellow Economics teachers and students all getting the tutor2u Economics team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uEconomics on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Related Collections

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u

A New Home for tutor2u Resources

We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores.

For every subject you can now access each digital resource as soon as it is ordered. This will always be the latest edition of each resource too (and we'll update you automatically if there is an upgraded version to use).

Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your mytutor2u account.