Relation between internal and external economies

No hard and fast line can be drawn between internal and external economies. When a number of firms combine into one external economies become internal economies. Whether particular economies are internal or external depends upon what operations it is profitable to combine. Internal economies are  result of expansion of individual firms, whereas external economies are the result of expansion or development of the entire industry of which the individual firms are members

It is worth noting that as commercial and technical education spreads. and other such developments take place, the field of internal economies is being narrowed and that of external economies is being widened. This is the result of progress in different fields

Internal and External Economizes

We should also take note of economies both internal and external, It is possible that the expansion of a firm’s output may lead to rise in costs  thus result in economists instead of economies this may be due to the fact that inferior or less efficient factors may have been brought into use. When a firm expands beyond proper limits. it is beyond the capacity of the manager to manage it efficiently. This also is an
example of an internal economy.

It is common experience that. when an industry in an industrial center expands. there is a keener competition among the firms for the factors of production and the raw materials. As a consequence. the prices of raw materials and of the factors of production go up. All firms have now to pay higher wages. higher rents and higher rates of interest besides higher prices for the raw materials. Suitable about ceases to be available; and capital also becomes scare. The result is that. with the expansion of an Industry the costs of production go up instead of falling. The main point is that the additional factors of production. the employment of which becomes now necessary, are less efficient and they are obtained at a higher cost. It is in this manner that economies result as an industry expands

Thus, as the scale of production of an individual increases, there are internal economies as well as internal economies. But, the internal economies generally outweigh internal economies . That is why, as the scale of production increases, average cost of production falls. But if the scale is increased beyond a proper limit, the internal economies will swallow up the internal economies and the cost of introduction rise instead of falling. In the same manner, when an industry expands, the firms enjoy external economies. But too much expansion will result in greater external economies than external economies. As a consequence, the cost of production goes up instead of falling.