Economies of Agglomeration - Advantages

Advantages

When firms form clusters of economic activity, there are particular development strategies that flow in and throughout this area of economic activity. This helps to accumulate information and the flow of new and innovative ideas among firms for the achievement of what economists call increasing returns to scale. With the establishment of a firm, there is always a fixed or average cost of production for the firm based on supplies needed (labor, capital, rent etc.) for the production of the firm. When this average cost of production falls as the result of the increased total output of a product, that indicates the presence of economies of scale; the terms "increasing returns to scale" and "economies of scale" may be used interchangeably.

Increasing returns to scale, or economies of scale, are internal to a firm and may allow for the establishment of more of the same firm outside the area or region. Economies of scale external to a firm are the result of spatial proximity and are referred to as agglomeration economies of scale. Agglomeration economies may be external to a firm but internal to a region. It is important to note that these increasing returns to scale are a major contributing factor to the growth of cities. Agglomeration economies exist when production is cheaper because of this clustering of economic activity. As a result of this clustering it becomes possible to establish other businesses which take advantage of these economies without joining any big organization. This process may help to urbanize areas as well.