What are external economies of scale?

External economies of scale refer to the benefits that reduce average costs for all firms in an industry as that industry grows in size. When an industry expands, the entire sector benefits from improvements in the business environment that are external to the individual firm. These benefits can arise from various sources, such as:

• Improved infrastructure: As an industry grows, investment in infrastructure such as transportation and communication systems may increase, leading to lower transportation costs for all firms within that industry.
• Skilled labor: A larger industry attracts more workers, resulting in a pool of skilled labor and specialized services that individual firms can utilize without having to invest heavily in training or development.
• Supplier networks: With an increase in demand, suppliers also expand, leading to lower input costs and improved access to raw materials.

These factors collectively contribute to a decrease in average costs for all firms within the industry as it grows, which aligns directly with the definition of external economies of scale, making it the correct answer.