We have always come across the word economies. What does it actually mean – It means careful management of available resources. Today through this blog we will understand two concepts: Economies of scope and Economies of agglomeration. Economies of scope occurs when the products have common inputs and the diversification leads to cost savings, whereas, Economies of Agglomeration is the reduction in the cost that firms obtain by locating themselves in proximity to each other.
Let us understand these two concepts through a real life example, that we notice in our day to day lives. Have you ever noticed vegetable sellers who sell varieties of vegetables – when you go to buy potato, you find that the same vegetable seller has various other vegetables like onion, tomato, Coriander, Chilly, etc. Why does this happen? It is because the vegetable seller can reduce his average cost as the fixed cost gets distributed by larger and larger amount of output produced , than what it would cost for separate vegetable sellers to produce each of these vegetables separately. Hence they benefit through this approach of cost saving. This is known as Economies of Scope.
Now let us look at - the different vegetable sellers who sell their vegetables in a Wholesale Vegetable Market (Sabzi Mandi). Why do they all sell together , nearer to each other – it is because by doing so they gather the information about their competitors – hence each other’s best practices can be adopted by the vegetable sellers. Also it becomes much more easy for them to meet the bundle of customers and the interaction between the customer and the seller gets easy. This is known as Economies of Agglomeration
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