How can a firm benefit from external economies?

Step 1: Analyze the question The question asks how a firm can benefit from external economies of scale. The key word is "external."

Step 2: Explain the concept

• Internal economies of scale are cost savings that come from within the firm because it grows bigger. Examples are bulk buying, specialisation of labour and advertising on a large scale.
• External economies of scale are cost savings that come from the growth of the whole industry or from the area where the firm is located. They are not caused by the firm's own expansion. Examples are: • A pool of skilled labour in the area • Good infrastructure such as roads, power and water • Availability of suppliers and related industries • Shared research, training institutions and marketing facilities

Step 3: Check each option

• A. Increasing expenditure on advertising: This is a decision made inside the firm. It is not an external economy.
• B. Increasing the workforce: This is an internal expansion and does not by itself produce cost savings from outside the firm.
• C. Locating in an area where the industry is already established: The firm gets access to skilled workers, suppliers, transport and services already developed by other firms. This is a classic external economy. Think of the Aba footwear cluster, the Ikeja industrial area in Lagos, or Nnewi for auto parts.
• D. Merging with another domestic firm in the same industry: A merger makes the firm bigger. That leads to internal economies (a larger scale of operation), not external ones.

Step 4: Answer The correct option is C.

Tip: Ask yourself, "Does the benefit come from the firm's own growth or from the industry or location around it?" If it comes from outside the firm (the industry cluster, infrastructure, local skills), it is external. If the firm's own size, merger or spending produces it, it is internal.