Economies of scale are applied in businesses for a longer period of time and it takes place when an organization reaches a point where its cost of production starts to lower down and it basically happens in the cases of bulk production whereas economies of scope happens when an organization produces multiple varieties of products and as a result of this its cost of production starts to reduce.
Both are the concepts of economics. And they both are very useful to a business that wants to grow and serves its customers better. Economies of scale are being applied in business for a very long time. Economies of scope are a comparatively new approach in business economics and strategy. Both facilitate in reducing the cost of production for business. In this article, we will go through each of these concepts in detail and then we will do a comparative analysis between them.
As a business, understanding and using both of these can be beneficial. But it is better that as a business you use these two prudently. You need to know where to use economies of scale and where to use economies of scope. Instead, in that case, if you go for economies of scope, it would be wiser. At the same time, if you know that as a company your core strength lies in producing just on. You need to know when and you need to know what.
This has been a guide to Economies of Scale vs Economies of Scope. Here we discuss the top differences between Economies of Scale and Economies of Scope along with infographics and comparison table. You may also have a look at the following articles to learn more —. Free Investment Banking Course.
Economies of Scale vs Economies of Scope
Forgot Password? Popular Course in this category. View Course. Email ID. Contact No. Please select the batch.An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently.
In such a case, the long-run average and marginal cost of a company, organization, or economy decreases due to the production of complementary goods and services. While economies of scope are characterized by efficiencies formed by variety, economies of scale are instead characterized by volume.
The latter refers to a reduction in marginal cost by producing additional units. Economies of scale, for instance, helped drive corporate growth in the 20th century through assembly line production.
Economies of scope are economic factors that make the simultaneous manufacturing of different products more cost-effective than manufacturing them on their own. In this case, a single train that has cars dedicated to both categories is far more cost effective, and may also result in lower ticket or tonnage costs for the train's users as well.
Economies of scope can occur because the products are co-produced by the same process, the production processes are complementary, or the inputs to production are shared by the products. Economies of scope can arise from co-production relationships between final products.
In economic terms these goods are called complements in production. This occurs when the production of one good automatically produces another good as a byproduct or a kind of side-effect of the production process. Sometimes one product might be a byproduct of another, but have value for use by the producer or for sale. Finding a productive use or market for the co-products can reduce both waste and costs and increase revenues.
For example, dairy farmers separate raw milk from cows into whey and curds, with the curds going on to become cheese. In the process they also end up with a lot of whey, which they can then use as a high-protein feed for livestock to reduce their overall feed costs or sell as a nutritional product to fitness enthusiasts and weightlifters for additional revenue. Another example of this is the so-called black liquor produced when processing wood into paper pulp.
Instead of being merely a waste product that might be costly to dispose of, black liquor can be burned as an energy source to fuel and heat the plant, saving money on other fuels, or can even be processed into more advanced biofuels for use on-site or for sale. Producing and using the black liquor thus saves costs on producing the paper. Economies of scope can also result from the direct interaction of two or more production processes.
Companion planting in agriculture is a classic example here, such as the "Three Sisters" crops historically cultivated by Native Americans. By planting corn, pole beans, and ground trailing squash together, the Three Sisters method actually increases the yield of each crop, while also improving the soil. The tall corn stalks provide a structure for the bean vines to climb up; the beans fertilize the corn and the squash by fixing nitrogen in the soil; and the squash shades out weeds among the crops with its broad leaves.
All three plants benefit from being produced together, so the farmer can grow more crops at lower cost. A modern example would be a co-operative training program between an aerospace manufacturer and an engineering school, where students at the school also work part time or intern at the business.Economies of scope and economies of scale are two concepts that explain why costs are often lower for larger companies. Economies of scope focus on the average total cost of production of a variety of goods.
In contrast, economies of scale focus on the cost advantage that arises when there is a higher level of production for one good. A company that benefits from economies of scope has lower average costs because costs are spread over a variety of products. For example, it is much easier for a restaurant chain to offer new dishes than to start a new restaurant chain offering the same new foods. Advertising can promote multiple dishes at the same time, and the new foods can be prepared and served using the same equipment and personnel.
Economies of scope work best when production or consumption is complementary. On the other hand, a company that benefits from economies of scale has a lower average cost because costs decrease as the amount produced increases.
For example, a company may be able to make million computer chips at a much lower cost per unit than 1 million chips. Once that is done, less money is required to produce additional chips. Economies of scale work best when fixed costs are high. The theory of an economy of scope states the average total cost of a company's production decreases when there is an increasing variety of goods produced.
Economies of scope give a cost advantage to a company when it makes a complementary range of products while focusing on its core competencies. Economy of scope is an easily misunderstood concept, especially since it appears to run counter to the ideas of specialization and scale economies at first glance. One simple way to think about economy of scope is to imagine that it is cheaper for two products to share the same resource inputs if possible than for each of them to have separate inputs.
Rail transportation provides an easy way to illustrate economies of scope. A single train can carry both passengers and freight more cheaply than having separate trains, one for passengers and another for freight. In this case, joint production reduces total input costs. In economic terminology, this means that one input factor's net marginal benefit increases after product diversification. Economies of scope help to explain why most successful companies offer extensive lines of related products and services.
For example, company ABC is the leading desktop computer producer in the industry. Company ABC wants to increase its product line and remodels its manufacturing building to produce a variety of electronic devices, such as laptops, tablets, and phones. Since the cost of operating the manufacturing building is spread out across various products, the average total cost of production decreases.
The costs of producing each electronic device in another building would be greater than just using a single manufacturing building to make multiple products. An economy of scale is the cost advantage a company has with the increased output of a good or service.
There is a negative relationship between the volume of production of goods and services and the fixed costs per unit for a company. For example, suppose company ABC, a seller of computer processors, considers purchasing processors in bulk. In the above example, the producer passes on the cost advantage of producing a larger number of computer processors onto company ABC.
This cost advantage arises because making the processors has the same fixed cost, whether it produces or processors. Generally, when the fixed costs are covered, the marginal cost of production for each additional computer processor decreases.
At lower marginal costs, additional units represent increasing profit margins. It offers companies the ability to drop prices if need be, improving the competitiveness of their products. Warehouse-style retailers, such as Costco and Sam's Club, package and sell large items in bulk partly due to realized economies of scale.
Although an economy of scale may seem beneficial to a company, it has some limits. Marginal costs rarely decrease perpetually. At some point, operations can become too large to keep experiencing significant economies of scale.
That forces companies to innovate, improve their working capitalor remain at their present optimal level of production. In many cases, economy of scope is a generalization of economy of scale rather than an opposing concept. Strictly speaking, an economy of scale allows a company to reduce production cost by sharing fixed overhead and other fixed costs across more units of a single good.This VPN will protect you if you like to connect to the internet through WiFi hotspots in cafes.
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Understanding Economies of Scope vs. Economies of Scale
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Guidelines Sign in to comment Showing 0 commentsSort by: Newest Oldest There was a problem loading comments right now. If you look closely, you will note that every tenth digit or so is just a repeat of the last digit and every hundredth or so is a just the same digit repeated three times.
Economies of Scope
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