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

Which of the following is an external economy of scale for a firm located in an industrial cluster such as the Tiruppur knitwear hub?

External economies come from the growth of the whole industry or cluster, not from a single firm's size. A skilled labour pool and specialised suppliers in the cluster lower costs for every firm there, whereas machines, bulk discounts and cheaper loans are internal economies.

  1. AThe firm installs a larger automatic machine that cuts its unit cost
  2. BThe firm negotiates a bulk discount on cotton from its supplier
  3. CThe firm borrows from a bank at a lower rate because of its size
  4. DThe availability of skilled workers and specialised suppliers in the cluster lowers every firm's costCorrect

Explanation

External economies arise from the growth of the industry or location and benefit all firms in it, such as a skilled labour pool and specialised suppliers. The other three options result from the firm's own expansion and are internal economies: technical, purchasing and financial.

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