Internal Economies of Scale vs. External Economies of Scale

As sales increase, due to diseconomies of the scale, production marginal cost increases and results in economies of scale. There are two types of economies of scale known as internal and external economies of scale. They are similar and different in various ways, and they influence international trade. 

Comparison 

Internal economies of scale take place internally, making them firm-specific. As a result, individual firm size matters since more giant corporations benefit from the cost advantage, while smaller businesses do not. This EOS type has more large firms than small companies, and so imperfectly competitive market structure is one of its attributes. 

On the contrary, the occurrence of external economies of scale depends on the profound changes outside corporations in a market. Consequently, industry size matters since its expansion lower the individual firms' costs, which otherwise could increase as a business tries to grow (Jackson, 2020). When this EOS type dominates an industry, small firms thrive more than large organizations, and they compete with each other entirely. 

Competitive advantages are more present in the internal economies of scale than the external, since competitors share the latter. Despite their differences, these EOS types result in reduced production costs but maintain the same net effect. 

Influence on International Trade 

The presence of external and internal economies of scale in production leads to international trade. Jackson (2020) concludes that they are crucial characteristics in production within an industry as they propel trade and specialization. In return, specialization and trade cause beneficial results in welfare benefits accruing to trading countries and world productive efficiency. 

Conclusion 

Economies of scale are significant because they enable the production of more output at lower costs. As a result, internal and external economies of scale motivate international trade due to efficiency improvements. 

Reference 

Jackson, D. (2020). Profitability, Mechanization and Economies of Scale . Routledge.