Relationship between internal and external economies are given below:
We have defined internal economics as those which are particular to an individual firm; whereas external economies are advantages which are shared by all the firms in an industry together.
However, as a broad spectrum, there is hardly any difference between the two types of economies.
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What may be an external economy for firm X may turn out to be an internal economy for firm Y.
Therefore, when we look at these economies in the background of the whole economy latter as one unit, they seem to be primarily internal economies.
For example, any expansion in production capacity of steel industry shall bring in economies in the form of internal economies to the steel producers.
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But consequent upon availability of cheaper steel, other firms that use steel as a raw material shall find reduction in their cost of production.
These reductions shall be in the form of external economies for the steel users. But for the whole economy, reduction in cost either for steep producers or for steel users amounts to an internal economy.
Prof. Robertson visualizes a situation in which a firm realizes both internal and external-economies simultaneously.
This he celebrates as ‘Internal external economies’. These can be explained with the help of the earlier example.
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When the raw material costs less to the steel users, they try to change their scale of production whereby they again derive additional advantages.
The former advantage was in the form of external economy, whereas the latter is in the form of internal economy.
In brief, internal and external economies are closely related and interdependent on each other.