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Economies of Scale

Detroit and some of its surrounding areas as Windsor and Ontario, represent a huge factor in the economy of the United States by being one of the major cities where trade takes place. General Motors, Ford and Chrysler also known as Americas ‘Big Three’ automobile companies are located in this city. The concept of External Scale Economies can help us explain why these three major companies are located in this area.

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Scales economies are important for a country because they represent a growth in its economy. Companies are able to produce more products or services at a lower cost of input. External scale economies are based on the size of an entire industry within a specific geographic area. ”1 These companies bulk in one specific area in this case Detroit, causing a decrease in the cost of the inputs by sharing some of these with the other surrounding companies, “this way the output of the industry within the area is larger”2 But how did Detroit turned out to be the spot for these major companies? Detroit’s location gave it the advantage to start growing as a transportation hub in the very beginning.

At the end of 19th century Detroit had shipping, shipbuilding and manufacturing industries, but what gave Detroit the main advantage for the businesses to settle there were the natural resources that it owned which eventually led automobile industries to be interested in this place for what meant for them: the external factors which provided a reduction in the firm’s cost. Some of these factors were coal, iron, and copper mining, Detroit was also easily accessible by water and by land; and it was near the nation’s leading, well-established production centers. One of Detroit’s strength was certainly the external factors mentioned above; it guided important industries towards its direction becoming what is now known as a global symbol. The agglomeration of these three big automobile companies has allowed the achievement of an external scale economy therefore a benefit for the United States’ economy. Notes 1. Thomas A. Pugel, “Chapter 6 Scale Economies, Imperfect Competition, and Trade”, International Economics, 15th Edition: Page 94 2. Ibid 3. Thomas J. Sugrue, Motor city: The story of Detroit. http://www. gilderlehrman. org/history-by-era/politics-reform/essays/motor-city-story-detroit