Internal economies of scale are firm-specific, or caused internally, while

external economies of scale occur based on larger changes outside of the

firm. Both types result in declining marginal costs of production; yet, the net
effect is the same. External economies of scale are generally described as
having an effect on the whole industry.
Economist Alfred Marshall first differentiated between internal and external
economies of scale. Marshall suggested that broad declines in the factors of
production, such as land, labor and effective capital, represented a
positiveexternality for all firms. These externality arguments are offered in
defense of public infrastructure projects or government research.
There are several different kinds of internal economies of scale. Technical
economies are achieved from the use of large-scale capital machines or
production processes. The classic example of a technical internal economy of
scale is Henry Ford's assembly line. Another type occurs when firms purchase
in bulk and receive discounts for their large purchases, or a lower cost per unit
of input. Cuts in administrative costs can cause marginal productivity to
decline, resulting in economies of scale.
Internal economies of scale tend to offer greater competitive advantages than
external economies of scale. This is because an external economy of scale
tends to be shared among competitor firms. The invention of the automobile or
the Internet helped producers of all kinds. If borrowing costs decline across
the entire economy because the government is engaged in expansionary
monetary policy, the lower rates can be captured by multiple firms. This does
not mean any external economy of scale is a wash. Companies can still take
relatively greater or lesser advantage of external economies of scale.
Nevertheless, internal economies of scale embody a greater degree of
exclusivity

Internal and External Diseconomies of Scale

The term diseconomies of scale refer to a situation where an increase in the size
of the firm leads to a rising average cost.

Diseconomies of scale may be classified into internal diseconomies and external

diseconomiesof scale.
The major internal diseconomies of scale arise from its size of the firm,
technical causes and managerial problems. When a firm achieves a size where it
is producing at the lowest possibleaverage cost it is said to be at its optimum
size.
The optimum size will very over time as technological progress change the
technique of production.
In addition to this, more loaded men and machinery leads to machine fault and
human failure cause breakdown of production. When the size increases
management becomes more complex and difficult. Managerial function of coordination, consultation and interdepartmental decision making will get delayed
due to the size.
There will be possibility of delay in implementation of decision within the
organization. Delay in communication will reduce the involvement of the
employees.
Sorting out and solving the problems of lack of identification and recognition
which reduce the commitment in long run.
There are some external diseconomies of scale in the form of disadvantages.
There is shortage of labour which causes a wage rise.
Increase in the demand for raw materials will also bid up prices.
When there is heavy localization of industries, the land for expansion will
become increasingly scarce. Scarcity will cause an increase in the price to
purchase land or to rent.
Transport costs may also rise because of increased congestion.
The change in output will cause a movement along the long run average
cost curve. One of the most significant influences is external economies of
scale. If external economies are experienced, the long run average cost will
shift down (output will be now be cheaper to produce). Whereas external
diseconomies of scale are encountered the long run average costcurve will move
up (output will now be costlier to produce). Improved technology would lower
the long run average cost curve.