External Economies[]

External Economies refer to the changing circumstances outside of an individual firm, but within a certain industry. The typical way this term is used is to refer to lowered costs because of increased industry output. External diseconomies refers to the opposite. For example, when an industry grows quickly the labor force which is trained in that industry remains fixed in the short-run, so the resulting higher cost of labor would be an external diseconomy.

Firm internalities are changes within one firm. Firm externalities are within the same industry but are beyond the scope of an individual firm.


  • Hirshlieifer, Glazer, Hirshleifer. Price Thoery and Applications: Decisions, Markets, and Information (seventh edition, 2005). Cambridge University Press, NY.