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 Scale A Scale B 5 10 Land 3 6 Labour Output 4 8 100 300 TC AC

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
Scale B

5
10

3
6

4
8

100
300

57
164

0.57
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 Dont 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

2m 5m

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

4m 4m 10m

Total Cost = Rs.1800 per journey AC = Rs.11.25/m3

Transport Container 2 = Volume 160m3

LONG run economies of scale

Y LAC

INR

ECO. OF SCALE

DIS-ECO. OF SCALE O OUT PUT

ECONOMIES OF SCALE

&

GLOBALIZATION

1. 2. 3.

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. 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

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 business

Diversification

Modernization

Related

Unrelated

ECONOMIES OF SCOPE V
Economies of Scope

/S ECONOMIES OF SCALE
Economies of Scale

Economies of scope is relatively a new approach to business strategy, and is heavily based on the development of high technology. Economies of linked to benefits producing a wide products by utilizing the Operations. scope is gained by variety of efficiently same

Economies of scale has been known for long time as a major factor in increasing profitability and contributing to a firms other financial and operational ratios. Economies of scale is about the benefits gained by the production of large volume of a product.

CONTINUED.
Economies of Scope

Economies of Scale

COST ADVANTAGE FROM VARIETY PRODUCT DIVERSIFICATION WITHN SAME SCALE OF PLANT.

COST ADVANTAGE FROM VOLUME STANDARDISATION

SAME PLANT OR EQUIPMENT PRODUCING MULTIPLE PRODUCTS.

LARGER PLANT

THANK YOU