Difference Between Economies of Scale and ... - Key Differences

Economies of scale involve product standardisation while economies of scope involve product diversification, using the same scale of the plant. EconomiesofScaleandEconomiesofscopearetwoimportantstrategiesusedbymostoftheorganizationstogaincosteffectiveness.Theeconomiesofscale,representsthesavingsincostofproductionbyincreasingthescaleofproductionorthesizeoftheplant. Ontheotherhand,economiesofscoperefertothebenefitsobtainedduetoproducingmultipleproductsusingthesameoperationsefficiently.Economiesofscope,isnothingbutthesavingsincostreceivedbyproducingtwoormoredistinctgoods,whenthecostofproductionso,relativelylessthanproducingitseparately. Peoplegetconfusedbetweenthesetwotechniqueseasilyastheybothresultsinaproportionatesavingincostofproduction.But,thereisadifferencebetweeneconomiesofscaleandeconomiesofscope,whichhasbeendiscussedinthisarticleindetail.Havealook. Content:EconomiesofScaleVsEconomiesofScope ComparisonChart Definition KeyDifferences Conclusion ComparisonChart BasisforComparisonEconomiesofScaleEconomiesofScope MeaningEconomiesofscalereferstosavingsinthecostduetoincreaseinoutputproduced.Economiesofscopemeanssavingsincostduetotheproductionoftwoormoredistinctproducts,usingsameoperations. ReductioninTheaveragecostofproducingoneproduct.Theaveragecostofproducingmultipleproducts. CostadvantageDuetovolumeDuetovariety StrategyOldRelativelyNew InvolvesProductstandardizationProductdiversification UseofLargeamountofresourcesCommonresources DefinitionofEconomiesofScale Bythetermeconomiesofscale,wemeantheincreaseintheefficiencyofproductionduetotheincreaseinsize,outputoractivitylevel. Economiesofscaleoccurduetotheindirectrelationshipbetweenthequantityproducedandtheperunitcostofproduction.Thisisbecausethefixed costremainssameirrespectiveofthelevelofproductionemployedbytheorganisation. Therefore,withtheriseinthescaleofoperation,thefixedcostisdistributedevenlyoverthequantityproduced.Sowitheveryadditionalunit produced,theaveragecostofproductiontendstodecline.Alongwiththat,variablecostperunitalsodecreases,duetooperationalefficiencyand synergy.Inthisway,theenterprisegainscosteffectiveness.Therecanbeinternalandexternaleconomiesofscale. DefinitionofEconomiesofScope EconomiesofScopereferstothereductionintheaveragecostperunit,byincreasingthevarietyofproductsproduced.Inthistechnique,thetotalcostofproducingtwoproducts(relatedorunrelated)islessthanthecostofproducingeachitemindividually. EconomiesofScopefocusesonbetterutilisationofthefirm’sresourcesandcommonassets.Inthisway,theutilisationofassetsisspreadovertwoormoreproducts,i.e.sharedbymultipleproductstodecreasetheoverallcostofproduction.Asthecostsarespreadoverseveralproductswhichleadtothedecreaseintheaveragecostperunitofeachproduct. KeyDifferencesBetweenEconomiesofScaleandEconomiesofScope Themajorpointsofdifferencebetweeneconomiesofscaleandeconomiesofscopeareexplainedbelow: AstrategyusedforcuttingcostsbyincreasingthevolumeofunitsproducedisknownasEconomiesofScale.EconomiesofScopeimpliesatechniquetolowerdownthecostbyproducingmultipleproductswiththesameoperationsorinputs. Ineconomiesofscaleisimplemented,theaveragecostofproducingaproductisreduced.Ontheotherhand,economiesofscopeimplyproportionatesavingsinthecostofproducingmultipleproducts. Ineconomiesofscale,thefirmgainscosteffectivenessduetovolume,whereascosteffectivenessineconomiesofscopeisduetothevarietiesoffered. Economiesofscalestrategyareusedbyorganisationssincealongtime.Conversely,EconomiesofScopeisarelativelynewstrategy. Economiesofscaleinvolveproductstandardisationwhileeconomiesofscopeinvolveproductdiversification,usingthesamescaleoftheplant. Ineconomiesofscale,abiggerplantisusedtoproducethelargevolumeofoutput.Asopposedtoeconomiesofscope,inwhichthesameplantisusedtomanufacturedistinctproducts. Conclusion Inthiseraofcompetition,itisveryimportantforthefirmstocutdowntheirexcesscosts,tooffertheirproductsatlowpricesandexpandtheirshareinthemarket.Botheconomiesofscaleandeconomiesofscoperesultinthesavingsincost,buttheirconceptisdifferent,wherebyonelowersthecostbyincreasingthevolumeofoutputandtheotherbyincreasingthenumberofproductsitoffers. 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