7.14
Economies of Scope
Economies of scope describe the lower costs a firm achieves by producing multiple products.
Suppose Firm A produces 800 cars by spending a specific amount, and Firm B produces 1,300 motorcycles for some given amount.
Firm C produces both cars and motorcycles. If Firm C can make 800 cars and 1,300 motorcycles while spending a lesser amount than Firms A and B spent together, then economies of scope occur for Firm C.
It arises because of the sharing of common inputs.
In producing cars and motorcycles, Firm C uses common resources, including a management team and skilled designers.
A management team overseeing the production of both products could be more productive in scheduling production and implementing quality control measures compared to two separate teams.
Also, skilled designers can work on both car and motorcycle design teams, applying their knowledge to create visually appealing designs for both types of vehicles.
However, diseconomies of scope describe the higher costs a firm incurs by producing multiple products. It could produce at lower cost by having separate firms, each focusing on a single product.
Economies of scope refer to a firm's cost advantages by producing a wider variety of products rather than focusing on a single product. Economies of scope are achieved when the total cost of producing multiple products together is less than the sum of producing each product independently. This production efficiency is primarily possible due to sharing common resources across the different types of outputs. This includes skilled labor, an efficient managerial team, or advanced technologies that can be used across different products.
Procter & Gamble, a leading conglomerate in consumer goods, uses its marketing expertise to promote multiple products, such as personal care items, alongside pharmaceutical products. Honda has specialized knowledge in internal combustion engines. It uses this expertise to improve the production of engines for a diverse set of products, including cars, motorcycles, lawnmowers, and snow blowers.
Economies of scope offers the opportunity for diversification. For instance, a carrier traditionally focusing on freight shipping might expand into passenger transport or provide logistical support services for other transport companies.
Diseconomies of scope occur when a firm incurs higher average costs by producing multiple products. For example, if a drug company chooses to make two drugs in the same factory, it must complete a stringent cleaning of all equipment to avoid cross-contamination whenever it switches production from one drug to the other. This specific and expensive cleaning step would not be required if they produced only one type of drug.
Economies of scope describe the lower costs a firm achieves by producing multiple products.
Suppose Firm A produces 800 cars by spending a specific amount, and Firm B produces 1,300 motorcycles for some given amount.
Firm C produces both cars and motorcycles. If Firm C can make 800 cars and 1,300 motorcycles while spending a lesser amount than Firms A and B spent together, then economies of scope occur for Firm C.
It arises because of the sharing of common inputs.
In producing cars and motorcycles, Firm C uses common resources, including a management team and skilled designers.
A management team overseeing the production of both products could be more productive in scheduling production and implementing quality control measures compared to two separate teams.
Also, skilled designers can work on both car and motorcycle design teams, applying their knowledge to create visually appealing designs for both types of vehicles.
However, diseconomies of scope describe the higher costs a firm incurs by producing multiple products. It could produce at lower cost by having separate firms, each focusing on a single product.
- Economies of Scope - Firm's cost advantages in diversely producing multiple products by sharing resources.
- Diseconomies of Scope - The increase in average costs from producing a variety of products.
- Scope of Microeconomics - Analyzes individual decision-making processes within the economic environment.
- Production Efficiency - Achieving the maximum output using minimal inputs, often connected to economies of scope.
- Diversification - A strategy to broaden the range of products or markets a company is involved in.
- Define Economies of Scope – Understand key economic benefits from varied product production (e.g., economies of scope).
- Contrast Economies vs Diseconomies of Scope – Differentiate between cost advantages and disadvantages in varied production (e.g., economies and diseconomies of scope).
- Explore Company Examples – Examine how corporations like Honda and P&G effectively employ economies of scope (e.g., Honda's diverse use of its engine production knowledge).
- Explain Economic Diversification – Understand why businesses would choose to broaden their product or market scope (e.g., opportunities for diversification).
- Apply Scope Definitions in Real World Scenarios – Analyze how understanding economies of scope can inform strategy decisions in production.
- What are economies of scope and how does shared resource usage contribute to production efficiency?
- What is distinguished between economies and diseconomies of scope and what are situational examples of each?
- How do companies such as Honda and Proctor and Gamble employ economies of scope in their business strategy?
From Chapter 7:
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