ECONOMIES OF

SCALE
V/S
ECONOMIES OF
SCOPE
PRESENTED BY,
GAURAV H. NANJANI
PGDBM. BATCH 09-11
RIZVI MANAGEMENT INSTITUTE.
BANDRA (w) MUMBAI
 INTRODUCTION.
ECONOMIES.
 Its all about cost effectiveness.

SCALE.
 Its all about the benefits gained by the
production of large volume of a product.

SCOPE.
 It is linked to the benefits gained by producing
a wide variety of products by efficiently utilizing
to same operations.
ECONOMIES
OF
SCALE.
 WHAT ARE ECONOMIES OF SCALE
 More units of a goods or service produced on
a larger scale,with less input 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 its costs.
 The term economies of scale refers to a
situation where the cost of producing one
unit of a good or service decreases as the
volume of production increases.
 ECONOMIES OF SCALE
Capital Land Labour Output TC AC

Scale A 5 3 4 100

Scale B 10 6 8 300

•Assume each unit of capital = Rs.5, Land = Rs.8 and Labour =

Rs.2
•Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of
production facility.
•What happens and why?
• AC = TC / Q
 ECONOMIES OF SCALE
Capital Land Labour Output TC AC

Scale A 5 3 4 100 57 0.57

Scale B 10 6 8 300 164 0.54

•Doubling the scale of production (a rise of 100%) has led

to an increase in output of 200% - therefore cost of
production
•PER UNIT has fallen
•Don’t get confused between Total Cost and Average Cost
•Overall ‘costs’ will rise but unit costs can fall
 CLASSIFICATION
ACCORDING TO MARSHALL
ECONOMIES OF
.
SCALE

EXTERNAL ECONOMIES INTERNAL ECONOMIES

LABOUR ECONOMIES.
TECHNICAL ECONOMIES.
MANAGERIAL ECONOMIES.
MARKETING ECONOMIES.
FINANCIAL ECONOMIES.
2 WAYS TO ACHIEVE ECONOMIES OF SCALE.

HIGH FIXED COST

&
CONSTANT MARGINAL COST.

LOW OR NO FIXED COST

&
DECLINING MARGINAL COST.
 Increased Dimensions: e.g.
PRINCIPLE OF BULK TRANSEKTION

Transport container = Volume of 20m3

Total Cost: Construction, driver, fuel,
2m maintenance, insurance, road tax =
2m Rs.600 per journey
5m AC = Rs.30/m3

Total Cost = Rs.1800

4m per journey
AC = Rs.11.25/m3

4m

10m
Transport Container 2 = Volume 160m3
 LONG run economies of scale
Y LAC

INR

ECO. OF SCALE DIS-ECO. OF SCALE

O O’
X

OUT PUT
 ECONOMIES OF SCALE
&
GLOBALIZATION
 Economies of scale is a practical concept
that is important for explaining real world
phenomena such as:
1. Patterns of international trade.
2. The number of firms in a market.
3. Trading pattern.
 Economies of scale refer to a firm's costs,
returns to scale describe the relationship
between inputs and outputs in a long-run
production function.
 POTENTIAL LIMITS
TO
ECONOMIES OF SCALE
 Market demand may be insufficient for businesses to fully exploit
the scale economies.
 Falling demand in a recession - capital will be under-utilised
leading to excess capacity and rising average total costs.
 “Niche markets” allow smaller-scale producers to supply at higher
cost because consumers are willing to pay a higher price.
 Some large units of fixed capital may not be transferable to other
uses if there is a sudden switch in consumer demand.
 A business may expand beyond the optimal size in the long run
and experience diseconomies of scale.
ECONOMIES
OF
SCOPE
 ECONOMIES OF SCOPE

 Economies of scope is a term that refers to

the reduction of per-unit costs through the
production of a wider variety of goods or
services.
 In economies of scope, firms try to take cost
advantages by providing a variety of related
products to make full use of the inputs rather
than specializing in the delivery of a single
product. Sharing or joint utilization of inputs
among similar products are the main reason
for economies of scale.
 Economies of scope play an important role in
firms decisions of what combination of goods
to produce.
 Globalization has made economies of scope
even more important to firms in their
production decisions.
 Economies of scope have been realized in
number of industries including FMCG,
telecom & healthcare.
EG. OF ECONOMIES OF SCOPE
 McDonalds can produce both hamburgers
and French fries at a lower average cost than
what it would cost two separate firms to
produce the same goods. This is because
McDonalds hamburgers and French fries
share the use of food storage, preparation
facilities, and so forth during production.
 ECONOMIST
V/S
ENTREPRENEUR
 Ec
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 n e u r `s s ays the
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 DEFINATION IN LAY MAN LANGUAGE
 Economies of scope means diversifying or
expanding the product line which will result
in more unit of output and profit with use of
certain amount of fixed cost and resources.
 when done correctly, economies of scope can
help companies gain a significant
competitive advantage.
 Expansion

Long
term
future
of
busines
s
Diversificatio
n
Modernizatio
n

Related Unrelated
ECONOMIES OF SCOPE V/S ECONOMIES OF
SCALE

Economies of Scope Economies of Scale

 Economies of scope” is  “Economies of scale”

relatively a new has been known for
approach to business long time as a major
strategy, and is heavily factor in increasing
based on the profitability and
development of high
technology. contributing to a firm’s
other financial and
operational ratios.
 Economies of scope is
linked to benefits gained
by producing a wide  Economies of scale is
variety of products by about the benefits gained
efficiently utilizing the by the production of large
same Operations. volume of a product.
CONTINUED.
Economies of Scope Economies of Scale

 COST ADVANTAGE  COST ADVANTAGE

FROM VARIETY FROM VOLUME

 PRODUCT  STANDARDISATION
DIVERSIFICATION
WITHN SAME SCALE
OF PLANT.

 SAME PLANT OR
 LARGER PLANT
EQUIPMENT
PRODUCING MULTIPLE
PRODUCTS.
THANK YOU