12/11/2019 Economies of Scope Definition - What is Economies of Scope 12/11/2019 Economies of Scope Definition - What is Economies of Scope

Economies of scope is an economic concept that the unit cost to produce a product will You can still sell pet sweaters, just to a broader audience. You’d no longer be a dog
decline as the variety of products increases. That is, the more different-but-similar fashion guru, but rather a pet sweater guru.
goods you produce, the lower the total cost to produce each one.
There’s no right or wrong answer here, it’s just a matter of determining what makes the
For example, let’s say that you’re a shoe manufacturer. You produce men’s and most sense for your business. Do you go deep or do you go broad product-wise in order
women’s sneakers. Adding a children’s line of sneakers would increase economies of to grow?
scope because you can use the same production equipment, supplies, storage, and
distribution channels to make a new line of products. That will further reduce the cost of
production on all your shoes.

The cost to produce all three of your different lines is lower than if three different
companies each produced a line of men’s shoes, a line of women’s shoes, and a
children’s line. Because 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.

Economies of Scale
You’ve probably heard of economies of scale, which is a similar economic concept – but
not exactly. Economies of scale are gained simply by producing more products –
through more volume. So if you were a necklace manufacturer, you could reduce the
cost per piece by producing more necklaces. As production increases, the average cost
per unit declines.

n contrast, with economies of scope, you need to produce more different types of
products using the same resources. So instead of producing more necklaces, you would
also produce bracelets and rings and earrings and charms, for example. You would add
new types of products that could be produced with the same equipment and materials in
order to reduce your average costs.

Generalist or Specialist
The challenge in pursuing economies of scope is the possibility of diluting what your
business was originally known for. So, let’s say you built a business based on trendy
dog clothes. You supplied handmade dog sweaters that were long-lasting and warm and
clever. It’s what you were known for.

To continue to build your business, you could focus on selling more of what you already
sell. That’s economies of scale. It also preserves your brand identity as a dog fashion
guru.

However, another strategy is to grow your business by expanding the markets you
serve, by adding products for animals other than dogs, like cats, and pigs, and goats.
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