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CMA Foundation · Fundamentals of Business Economics and Management · Cost of Production

Which of the following is an example of an external economy of scale for a textile firm in a Tirupur cluster?

Skilled labour and specialised suppliers that develop because many firms cluster together are external economies of scale. They benefit all firms from industry growth, whereas bulk discounts, division of labour and cheaper credit from own size are internal economies.

  1. AAvailability of skilled labour and specialised suppliers developed because many firms are located in the clusterCorrect
  2. BBulk purchase discount obtained by the firm on its own cotton orders
  3. CBetter use of the firm's own machinery through division of labour
  4. DLower interest rate secured by the firm due to its own large size

Explanation

External economies arise from growth of the industry or locality and are enjoyed by all firms in it, such as a skilled labour pool, supplier networks and shared infrastructure. The other options come from the firm's own expansion, so they are internal economies: purchasing, technical and financial.

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