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Economies of Scale vs. Scope Explained

This document discusses three economic concepts: economies of scale, diseconomies of scale, and economies of scope. Economies of scale refer to average costs declining as output increases, due to factors like technical, commercial, organizational, or financial advantages. Diseconomies of scale occur when average costs rise with increased output, due to inefficiencies from issues like poor communication or lack of control. Economies of scope exist when the average total cost of producing multiple goods is lower than separate firms each producing a single good. The minimum efficient scale is the lowest production point where long-run average costs are minimized.

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31 views16 pages

Economies of Scale vs. Scope Explained

This document discusses three economic concepts: economies of scale, diseconomies of scale, and economies of scope. Economies of scale refer to average costs declining as output increases, due to factors like technical, commercial, organizational, or financial advantages. Diseconomies of scale occur when average costs rise with increased output, due to inefficiencies from issues like poor communication or lack of control. Economies of scope exist when the average total cost of producing multiple goods is lower than separate firms each producing a single good. The minimum efficient scale is the lowest production point where long-run average costs are minimized.

Uploaded by

salman_shaji
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

ECONOMIES OF SCALE , DISCONOMIES OF

SCALE & ECONOMIES OF SCOPE

By,

1
INTRODUCTION

In long run, all inputs are varied. As its varied Law of Diminshing
Returns to does not apply, thus Economies of Scale becomes
applicable.

CONSTANT REURNS TO SCALE – output increases in the same


proportion as input.

DISECNOMIES OF SCALE – output increase in less than in


proportion of input.

ECONOMIES OF SCALE – output increase in more than in


proportion of input.

OUTPUT will vary with variations INPUT ( Labour , Capital , etc,.)


2
ECONOMIES OF SCALE

3
DEFINITION

Factors which cause average cost to decline


in the long run as output increases.

USES OF ECONOMIES OF SCALE :

Economies of scale is a practical concept that is important for


explaining real world phenomena such as patterns of international
trade, the number of firms in a market, and how firms get “too big
to fail". The exploitation of economies of scale helps explain why
companies grow large in some industries

4
REASON FOR ECONOMIES OF SCALE

Internal – advantages that arise as a result


of the growth of the firm

•Technical
•Commercial or Marketing
•Organisational
•Financial

5
External – the advantages firms can gain as a
result of the growth of the industry – normally
associated with a particular area.

•Supply of skilled labour


•Reputation
•Local knowledge and skills
•Infrastructure
•Training facilities

6
DISECONOMIES OF SCALE

7
DEFINITION

Diseconomies of scale occurs when average


costs starts to rise with increased output.

USES OF DISECONOMIES OF SCALE :


The implications of diseconomies of scale is that companies should
achieve a certain size to benefit fully from scale economies , but
should not become too big , when cost controls might slacken and
organizational inefficiency is likely to develop.

8
REASON FOR DISECONOMIES OF SCALE

• Poor communication
• Alienation
• Lack of control

9
10
MINIMUM EFFICIENT
SCALE

11
DEFINITION

The minimum efficient scale is defined as the lowest


production point at which long-run total average costs
are minimized.

USE OF MINIMUM EFFICIENT SCALE :


For instance, if the minimum efficient scale is small relative to
the overall size of the market (demand for the good), there
will be a large number of firms. The firms in this market will
be likely to behave in a perfectly competitive manner due to
the large number of competitors.

12
ECONOMIES OF SCOPE

• The average total cost of production declines as


a result of increasing the number of different
goods produced.
• Economies of scope exist if a firm can produce
several product lines at a given output level
more cheaply than a combination of separate
firms each producing a single product at the
same output level.

13
Methods to gain Economies of scope

• Flexible manufacturing
New products
Low cost

• Diversification
Sharing of resources
Competitiveness

14
DIFFERENCE BETWEEN ECONOMIES OF
SCALE AND ECONOMIES OF SCOPE

• Economies of scope deals with how much output


changes according to how many firms are producing a
product and Economies of scale deals with how much
output changes according to cost of production.
• Economies of scope: joint output of a single firm is
greater than output that could be achieved by two
different firms when each produces a single product but
in Economies of scale output can be doubled for less
than a doubling of cost.

15
QUESTIONS ?

16

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