Economies of Scale & Scope

Economies of Scale

When more units of a good or a service can be produced on a large scale, yet with fewer inputs costs, economies of scale are said to be achieved alternatively this means that as a company grows and production units increase, a company will have a better chance to decrease costs.

Economies of scale may also reduce variable costs per unit because of operational efficiency and synergy. Internal economies of scale occur when company’s effort result in cost benefits. Final benefits can occur when larger firms are able to obtain loans at lower rates of interest than smaller firms.

Big companies are often more profitable than smaller companies because of economies of scale: suppliers may offer discount for larger orders, shippers may decrease per trip costs to compete for larger volume of business and necessary production management staff may increase internal manufacturing efficiency

It’s cheaper to buy things like food and office products in bulk because it’s way cheaper for the manufactures to sell these products in bulk it’s simple economies of scale.

                                               

Economies of scope

In terms of industrial organization economies of scope are present in enterprises that develop and manufacture a variety of related product. Such expertise in technologies to the full range of products related to those core technologies.

Let’s assume company XYZ manufactures vacuum cleaners. What would happen if the company decide to branch out into brooms? Adding brooms to the product line would allow XYZ to spread certain fixed costs over a larger number of fixed costs over a larger number of units. Thus the company could reach more customers with its advertisement budget, its sales force could be used to sell both products. Here XYZ increased the variety of items produced rather than increasing the number of vacuum cleaners produced. As a result, the company’s advertising, selling and distribution costs may generally remain the same but its number of products sold will increase.

Credits. Investinganswers.com, businessdictionary.com,quora.com