Economics of scope is a vital chapter in Economics. It is too unfortunate that we do not learn much about this crucial phenomenon in our primary educational phase. However, it is never too late to learn something new. Additionally, if you are pursuing higher studies in Economics, you are expected to learn about it as per the curriculum.
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The Economies of Scope is a vital economic concept that implies the production of one good diminishes the cost of production-related another good. This occurs when producing a diverse range of goods or services in tandem is more cost-effective for a firm than producing less of a variety or producing each good independently. If such happens to be the case, then the long-run average and the marginal cost of a company, organization, or company decreases due to the production of complementary goods and services.
The term and the development of this vital concept are attributed to the well-renowned economists' John C. Panzar and Robert D, Wilig (1977, 1981).
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Now that you are well-versed with the concept of economies of scope let’s plunge deep into comprehend the true meaning of economies of scope as per the Quizlet.
As per the flashcards of Quizlet, economies of scope indicate the cost savings of a firm created through the successful sharing of resources and capabilities. It also can occur through transferring one or more corporate-level core competencies that were developed in one of its businesses to another of its businesses.
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Economies of scope demonstrate that the unit cost to generate a product will eventually decline as the variety of products increases. That means the more distinct- but similar goods you produce, the lower will be the total cost to produce each one.
Let’s say, for instance, you are a shoe manufacturer. You manufacture sneakers for both men and women. Adding a kid’s line of sneakers will increase the economies of scope as you can use the same production equipment, supplies, storage, and distribution channels to create a new product line. This will further reduce the cost of production on all your shoes.
The cost to manufacture all three of your different lines is lower than if three different companies each produced a men's shoe line, a women's shoe line, and a kid's shoe line. As you can extend the use of your resources to make more products to be sold to your same target market, you can continue to drive costs down.
We will give you another example. Starbucks has a strong brand name for coffee retail on the high street. It took the decision to deliver an instant coffee- with the use of its own brand name and financial resources. This is an economy of scope, as it has a greater variety of coffee.
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Economies of scope are often confused with the economies of scale. Here we have enlisted the key differences between the economies of scale and economies of scope-
Basis For Comparison
|
Economies Of Scope |
Economies Of Scale |
Meaning |
It saves the cost of production if a company manufactures a diverse range of products. |
It saves the cost of production beyond a certain point. |
Reduces The Cost Of |
Multiple products |
One product |
It’s About |
Producing multiple products under the same operation. |
Producing one type of product in a bulk. |
Reduction Due To |
Varieties in production |
Bulk Production |
New/ Old |
Comparatively new concept and is recently used by businesses. |
Relatively old concept and is used everywhere. |
Uses |
A lot fewer resources as under one operation multiple products are produced |
A huge quantity of resources as the production happens in a bulk
|
Example |
Production of multiple food items by using the same resources |
Production of one kind of smartphone in huge quantities. |
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