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A comparison of the concepts of economics of scale and economics of scope

Common resources Definition of Economies of Scale By the term economies of scale, we mean the increase in the efficiency of production due to the increase in size, output or activity level.

  • Diseconomies of scale also can occur when a firm becomes so large that;
  • Both economies of scale and economies of scope result in the savings in cost, but their concept is different, whereby one lowers the cost by increasing the volume of output and the other by increasing the number of products it offers;
  • However, if the plant is used to build 6 million cars per year, the highly specialized techniques of the assembly line allow a significant reduction in costs per car;
  • The costs of producing each electronic device in another building would be greater than just using a single manufacturing building to produce multiple products;
  • As the costs are spread over several products which lead to the decrease in the average cost per unit of each product;
  • The growth of supporting facilities and services is encouraged by a firm's large scale of operation.

Economies of scale occur due to the indirect relationship between the quantity produced and the per unit cost of production. Therefore, with the rise in the scale of operation, the fixed cost is distributed evenly over the quantity produced.

There can be internal and external economies of scale. Definition of Economies of Scope Economies of Scope refers to the reduction in the average cost per unit, by increasing the variety of products produced.

Difference Between Economies of Scale and Economies of Scope

In this technique, the total cost of producing two products related or unrelated is less than the cost of producing each item individually. In this way, the utilisation of assets is spread over two or more products, i.

  • Larger firms have a cost advantage over their competitors;
  • Definition of Economies of Scope Economies of Scope refers to the reduction in the average cost per unit, by increasing the variety of products produced;
  • As opposed to economies of scope, in which the same plant is used to manufacture distinct products;
  • This can happen if processes become "out of balance," or when one process cannot produce the same output quantity as a related process.

As the costs are spread over several products which lead to the decrease in the average cost per unit of each product. Key Differences Between Economies of Scale and Economies of Scope The major points of difference between economies of scale and economies of scope are explained below: A strategy used for cutting costs by increasing the volume of units produced is known as Economies of Scale.

How do Economies of Scope and Economies of Scale Differ?

Economies of Scope implies a technique to lower down the cost by producing multiple products with the same operations or inputs. In economies of scale is implemented, the average cost of producing a product is reduced. On the other hand, economies of scope imply proportionate savings in the cost of producing multiple products. In economies of scale, the firm gains cost effectiveness due to volume, whereas cost effectiveness in economies of scope is due to the varieties offered.

  • According to Langlois, some economies of scale result from the specialization and division of labor;
  • Finally, greater specialization tends to eliminate the loss of time that accompanies the shifting of workers from one job to another;
  • If a firm builds a large plant in a particular area, an improvement in highways and expanded transportation services may soon follow.

Economies of scale strategy are used by organisations since a long time. Conversely, Economies of Scope is a relatively new strategy. Economies of scale involve product standardisation while economies of scope involve product diversification, using the same scale of the plant.

Economies of Scale vs Economies of Scope

In economies of scale, a bigger plant is used to produce the large volume of output. As opposed to economies of scope, in which the same plant is used to manufacture distinct products. Conclusion In this era of competition, it is very important for the firms to cut down their excess costs, to offer their products at low prices and expand their share in the market.

Both economies of scale and economies of scope result in the savings in cost, but their concept is different, whereby one lowers the cost by increasing the volume of output and the other by increasing the number of products it offers.