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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.

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