When a firm is experiencing economies of scaleStarbucks economies of scopeeconomies of scope中文Economies of scope economies of scaleDiseconomies of scopeEconomies of scope example

Understanding Economies of Scope vs. Economies of Scale

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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. Economics GuidetoMicroeconomics EconomiesofScopevs.EconomiesofScale:AnOverview Economiesofscopeandeconomiesofscalearetwoconceptsthatexplainwhycostsareoftenlowerforlargercompanies.Economiesofscopefocusontheaveragetotalcostofproductionofavarietyofgoods.Incontrast,economiesofscalefocusonthecostadvantagethatariseswhenthereisahigherlevelofproductionforonegood. KeyTakeaways Acompanythatbenefitsfromeconomiesofscopehasloweraveragecostsbecausecostsarespreadoveravarietyofproducts.Acompanythatbenefitsfromeconomiesofscalehasaloweraveragecostbecausecostsdecreaseastheamountproducedincreases.Inmanycases,economyofscopeisageneralizationofeconomyofscaleratherthananopposingconcept. Acompanythatbenefitsfromeconomiesofscopehasloweraveragecostsbecausecostsarespreadoveravarietyofproducts.Forexample,itismucheasierforarestaurantchaintooffernewdishesthantostartanewrestaurantchainofferingthesamenewfoods.Advertisingcanpromotemultipledishesatthesametime,andthenewfoodscanbepreparedandservedusingthesameequipmentandpersonnel.Economiesofscopeworkbestwhenproductionorconsumptioniscomplementary. Ontheotherhand,acompanythatbenefitsfromeconomiesofscalehasaloweraveragecostbecausecostsdecreaseastheamountproducedincreases.Forexample,acompanymaybeabletomake100millioncomputerchipsatamuchlowercostperunitthan1millionchips.Thecompanyhastospendacertainamountofmoneyonresearchanddevelopment(R&D)foreachchip,aswellasmoneysettingupeachfactory.Oncethatisdone,lessmoneyisrequiredtoproduceadditionalchips.Economiesofscaleworkbestwhenfixedcostsarehigh. 1:17 EconomiesofScope EconomiesofScope Thetheoryofaneconomyofscopestatestheaveragetotalcostofacompany'sproductiondecreaseswhenthereisanincreasingvarietyofgoodsproduced.Economiesofscopegiveacostadvantagetoacompanywhenitmakesacomplementaryrangeofproductswhilefocusingonitscorecompetencies.Economyofscopeisaneasilymisunderstoodconcept,especiallysinceitappearstoruncountertotheideasofspecializationandscaleeconomiesatfirstglance.Onesimplewaytothinkabouteconomyofscopeistoimaginethatitischeaperfortwoproductstosharethesameresourceinputs(ifpossible)thanforeachofthemtohaveseparateinputs. Railtransportationprovidesaneasywaytoillustrateeconomiesofscope.Asingletraincancarrybothpassengersandfreightmorecheaplythanhavingseparatetrains,oneforpassengersandanotherforfreight.Inthiscase,jointproductionreducestotalinputcosts.Ineconomicterminology,thismeansthatoneinputfactor'snetmarginalbenefitincreasesafterproductdiversification. Economiesofscopehelptoexplainwhymostsuccessfulcompaniesofferextensivelinesofrelatedproductsandservices. Forexample,companyABCistheleadingdesktopcomputerproducerintheindustry.CompanyABCwantstoincreaseitsproductlineandremodelsitsmanufacturingbuildingtoproduceavarietyofelectronicdevices,suchaslaptops,tablets,andphones.Sincethecostofoperatingthemanufacturingbuildingisspreadoutacrossvariousproducts,theaveragetotalcostofproductiondecreases.Thecostsofproducingeachelectronicdeviceinanotherbuildingwouldbegreaterthanjustusingasinglemanufacturingbuildingtomakemultipleproducts. Real-worldexamplesofeconomiesofscopecanbeseeninmergersandacquisitions(M&A),newlydiscoveredusesofresourcebyproducts,andwhentwoproducersagreetosharethesamefactorsofproduction. EconomiesofScale Aneconomyofscaleisthecostadvantageacompanyhaswiththeincreasedoutputofagoodorservice.Thereisanegativerelationshipbetweenthevolumeofproductionofgoodsandservicesandthefixedcostsperunitforacompany. Forexample,supposecompanyABC,asellerofcomputerprocessors,considerspurchasingprocessorsinbulk.Theproducerofthecomputerprocessors,companyDEF,quotesapriceof$10,000for100processors.However,ifcompanyABCbuys500computerprocessors,theproducerquotesapriceof$37,500.IfthecompanyABCdecidestopurchase100processorsfromcompanyDEF,ABC'sperunitcostis$100.However,ifABCbuys500processors,itsperunitcostis$75. Intheaboveexample,theproducerpassesonthecostadvantageofproducingalargernumberofcomputerprocessorsontocompanyABC.Thiscostadvantagearisesbecausemakingtheprocessorshasthesamefixedcost,whetheritproduces100or500processors. Generally,whenthefixedcostsarecovered,themarginalcostofproductionforeachadditionalcomputerprocessordecreases.Atlowermarginalcosts,additionalunitsrepresentincreasingprofitmargins.Itofferscompaniestheabilitytodroppricesifneedbe,improvingthecompetitivenessoftheirproducts.Warehouse-styleretailers,suchasCostcoandSam'sClub,packageandselllargeitemsinbulkpartlyduetorealizedeconomiesofscale. Althoughaneconomyofscalemayseembeneficialtoacompany,ithassomelimits.Marginalcostsrarelydecreaseperpetually.Atsomepoint,operationscanbecometoolargetokeepexperiencingsignificanteconomiesofscale.Thatforcescompaniestoinnovate,improvetheirworkingcapital,orremainattheirpresentoptimallevelofproduction. SpecialConsiderations Inmanycases,economyofscopeisageneralizationofeconomyofscaleratherthananopposingconcept.Strictlyspeaking,aneconomyofscaleallowsacompanytoreduceproductioncostbysharingfixedoverheadandotherfixedcostsacrossmoreunitsofasinglegood.Aneconomyofscopeenablesafirmtoreducecostsbysharingfixedcostsbetweenseveraldifferentgoods. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedArticles GuidetoMicroeconomics MarginalBenefitvs.MarginalCost:What'stheDifference? FinancialAnalysis MarginalRevenueandMarginalCostofProduction GuidetoMicroeconomics WhatAreEconomiesofScale? FinancialAnalysis HowDoFixedandVariableCostsAffecttheMarginalCostofProduction? CorporateFinance HowDoesSpecializationHelpCompaniesAchieveEconomiesofScale? Sectors&Industries WhatAretheKeyBarrierstoEntryinElectronics? PartnerLinks RelatedTerms EconomiesofScopeDefinition Economiesofscopeareeconomicfactorsthatmakeitcheapertomanufactureawidervarietyofproductstogetherinsteadofontheirown. more WhatAreEconomiesofScale? Economiesofscalearecostadvantagesreapedbycompanieswhenproductionbecomesefficient. more WhatIsMarginalCost? Marginalcostisthechangeintotalcostthatcomesfrommakingorproducingoneadditionalitem. more Scope Scopeisaprojectmanagementtermfortheobjectivesnecessarytocompleteaproject,allowingmanagerstoestimatecostsandtimerequired. more Long-RunAverageTotalCost(LRATC)Definition Long-runaveragetotalcostisacalculationthatshowstheaveragecostperunitofoutputforproductionoveralengthyperiod.AgoalofbothcompanymanagementandinvestorsistodeterminethelowerboundsofLRATC. more LongRunDefinition Thelongrunreferstoaperiodoftimewhereallfactorsofproductionandcostsarevariable,andthegoalistoproduceatthelowestcost. more

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