external economies of scale

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These arise when the entry of new firms into an industry causes the minimum average total cost of all firms in the industry to fall. This can occur if the prices of inputs fall as suppliers of inputs exploit economies of scale as demand for their products increases. Through this mechanism an expansion of the industry (but not of an individual firm) causes minimum average total cost to fall for all firms in the industry. The industry long-run supply curve therefore slopes downwards.

Subjects: Economics.

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