Describe the two sources of economies of scale and how these economies

Describe the two sources of economies of scale and how these economies of scale lead to intraindustry trade.

What will be an ideal response?

ANSWER

Internal economies of scale come from decreasing average costs as production increases. The source of the decrease in average costs could be the spread of fixed costs over a greater number of units of output, which might come from plant size, significant research and development costs, marketing or market research costs, engineering, etc. Increasing the size of the firm’s market decreases average production costs. Consumers benefit from more choices and lower prices. Product differentiation is enhanced through the introduction of a foreign firm’s products in the domestic market. External economies of scale come from a concentration of an industry in a specific geographic location. There is no cost advantage to the firm being larger, but because the industry is focused in a specific location, labor and other input markets are deep and highly specialized. Firms benefit from knowledge spillover in both formal and informal ways.