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    Economies of Scope & Scale

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    aadityatours
    Economies of scope arise when a company can produce different products using the same facilities and resources, reducing costs compared to producing each product separately. Economies of scale occur when average costs decrease as production increases, allowing for lower prices through bulk purchasing and shared overhead costs. Aircraft manufacturers like Airbus benefit from both economies of scope by producing different aircraft types and economies of scale through large production volumes that give them bargaining power with suppliers.

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    Economies of Scope & Scale

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    aadityatours
    217 views2 pages
    Economies of scope arise when a company can produce different products using the same facilities and resources, reducing costs compared to producing each product separately. Economies of scale occur when average costs decrease as production increases, allowing for lower prices through bulk purchasing and shared overhead costs. Aircraft manufacturers like Airbus benefit from both economies of scope by producing different aircraft types and economies of scale through large production volumes that give them bargaining power with suppliers.

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    Economies of scope arise when a company can produce different products using the same facilities and resources, reducing costs compared to producing each product separately. Economies of scale occur when average costs decrease as production increases, allowing for lower prices through bulk purchasing and shared overhead costs. Aircraft manufacturers like Airbus benefit from both economies of scope by producing different aircraft types and economies of scale through large production volumes that give them bargaining power with suppliers.

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    Download as docx, pdf, or txt
    217 views2 pages

    Economies of Scope & Scale

    Uploaded by

    aadityatours
    Economies of scope arise when a company can produce different products using the same facilities and resources, reducing costs compared to producing each product separately. Economies of scale occur when average costs decrease as production increases, allowing for lower prices through bulk purchasing and shared overhead costs. Aircraft manufacturers like Airbus benefit from both economies of scope by producing different aircraft types and economies of scale through large production volumes that give them bargaining power with suppliers.

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    Economies of scope arise from flexibility to produce different types of products, depending on changes in demand, from the same

    plant without much investment in alteration as well as diversification of risk through catering to different markets. As against this Economies of scale results from lower raw material purchasing costs, lower overheads, lower marketing costs etc resulting from higher scales of production rather than lower scales of production. Eg: The Airbus Company can generate both economics of scope by having markets for different types of civilian aircrafts for different airlines of different countries thereby diversifying risks of fluctuating demand for different types of aircrafts and demand from different national/ international carriers. Airbus can also benefit from large-scale production because of better bargaining power vis a vis suppliers of engines, components, instruments, spares, etc. That is why both Airbus and Boeing try to get orders for large fleets and orders from different carriers. Design and research of new, more efficient and different size of aircrafts takes time. The production cycle is also long. So aircraft manufacturers require large flow of orders in advance and from different buyers so that problems for some buyers do not affect their operations. Small size aircraft manufacturers are not viable. That is why even a number of countries in Europe joined together to have one single large manufacturer. To understand the difference between economies of scale and economies of scope: Economies of scope are conceptually similar to economies of scale. Whereas economies of scale primarily refer to efficiencies associated with supply-side changes, such as increasing or decreasing the scale of production, of a single product type, economies of scope refer to efficiencies primarily associated with demand-side changes, such as increasing or decreasing the scope of marketing and distribution, of different types of products. Economies of scope are one of the main reasons for such marketing strategies as product bundling, product lining, and family branding. Often, as the number of products promoted is increased and broader media used, more people can be reached with each dollar spent. This is one example of economies of scope. These efficiencies do not last, however, at some point, additional advertising expenditure on new products will start to be less effective (an example of diseconomies of scope). If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location. Further economies of scope occur when there are cost-savings arising from by-products in the production process. An example would be the benefits of heating from energy production having a positive effect on agricultural yields.

    A company which sells many product lines, sells the same product in many countries, or sells many product lines in many countries will benefit from reduced risk levels as a result of its economies of scope. If one of its product lines falls out of fashion or one country has an economic slowdown, the company will, most likely, be able to continue trading. Not all economists agree on the importance of economies of scope. Some argue that it only applies to certain industries, and then only rarely. Economies of scale characterize a production process in which an increase in the scale of the firm causes a decrease in the long run average cost of each unit. Economies of scale can be enjoyed by any size firm expanding its scale of operation. The common ones are purchasing (bulk buying of materials through long-term contracts), managerial (increasing the specialization of managers), financial (obtaining lower-interest charges when borrowing from banks and having access to a greater range of financial instruments), marketing (spreading the cost of advertising over a greater range of output in media markets). Each of these factors reduces the long run average costs (LRAC) of production by shifting the short-run average total cost (SRATC) curve down and to the right. This should not be confused with increasing returns to scale which is represented by the SRATC where simply increasing output within current capacity reduces the short run cost per unit. This is, of course, an extremely simplistic example and, in real life, there are countering forces of diseconomies of scale. As these forces balance, an optimum production volume can be found (referred to as constant returns to scale). A natural monopoly is often defined as a firm which enjoys economies of scale for all reasonable firm sizes; because it is always more efficient for one firm to expand than for new firms to be established, the natural monopoly has no competition. However, standard economic theory also holds that on account of the unique shapes of the natural monopoly's LRAC and SRAC, it can never experience economic profit and thus requires subsidies or other government intervention to remain profitable. In the short run at least one factor of production is fixed. Therefore the SRAC curve will fall and then rise as diminishing returns sets in. In the long run however all factors of production vary and therefore the LRAC curve will fall and then rise according to economies and diseconomies of scale.

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