External economies are those economies which accrue to each member firm as a result of the expansion of the industry as a whole. Expansion of an industry may lead to the availability of new and cheaper raw materials, tools and machinery, and to the discovery and diffusion of a superior technical knowledge. Some raw materials and tools may be made available at reduced prices, because as the industry grows, subsidiary and correlated firms may spring up in the vicinity of the industry to provide it with raw materials and tools at reduced prices
Thus, the entry of new firms enlarging the size of an industry may enable all firms to produce at lower cost, The large-scale firm reap; internal economies. The large-scale industry brings to the firms external economies. There is every possibility of external economies to be reaped when a young industry grows in a new territory. Various types of external economies are give below
Economies Concentration. These economies relate to advantages arising from the availability of skilled workers, the provision of better transport and credit facilities, stimulation of improvements, benefits from subsidiaries, and so on. Scattered firms cannot enjoy such economies. These are the advantages of a Socialized industry. Every firm in the industry shares the common stock of knowledge and experience. Concentration of firms enables the transport system to cut down costs. Such economies are of special importance in a country like India which has not yet been fully industrialized
Economies information. These economies refer to the benefits which all firms engaged in an industry derive from publication of trade and technical journals and from central research institutions. In a localized industry, research and experiments are centralize. Each individual firm need not incur expenditure on research. It can draw such benefits from the common pool. Such schemes are beyond the capacity of individual firms, Firms in a scattered industry cannot have such facilities.
Economies of Disintegration. When an industry grows, it becomes possible to-split up some of the processes which are taken over specialist firms. For example, a number of cotton m.ills located in particular locality may have the benefit of a separate calendering plant.
External Economies (Its effect)
Due to external economies the cost of production per unit may be reduced. It also may help in the shift of the LAC (Long-run average cost curve) down word to LAC’. It depends on how powerful the external economies. Before the external economies the firm may be producing at ‘ON’ amount of cost and ‘OQ’ amount of quantity but now it may be producing the same quantity viz. ‘OQ’ at a lower cost ‘OK’.