Define both internal and external economics of scale. How do economies of scale play into trade between two countries with one factors of production?
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Economies of scale is a long run concept. In the long run all inputs, such as capital and labor, are variables. Economies of scale is a situation where a firm's long-run average cost (LRAC) declines as output increases . In the long run firm is able to vary its factors of production (inputs) to reduce its LRAC. In other words, its cost per unit of output is lower.
The key for you to understand the concept of economies of scale is to understand; what are the sources for a declining in the cost of production as the size of production increases (by varying all factors of production including capital). Among others, the sources ...
Both internal and external economies of scale are able to reduce the long-run average cost of production as the size of production increases. Internal economies of scale is refer to the internally generated sources of reduction in cost. On the other hand, the external economies of scale is due to the externally generated sources contributing towards cost reduction. Two countries are able to benefit from specialization and trade and at the same time enjoying the benefit of economies of scale through the improvement in labor productivity.