ECONOMIES OF SCALE V/S ECONOMIES OF SCOPE
PRESENTED BY, GAURAV H. NANJANI PGDBM. BATCH 09-11 RIZVI MANAGEMENT INSTITUTE.
BANDRA (w) MUMBAI
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.
this means that as a company grows and production units increase.
.WHAT ARE ECONOMIES OF SCALE
More units of a goods or service produced on a larger scale.with less input costs. Alternatively. economies of scale are said to be achieved. 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.8 and Labour = Rs. •What happens and why? • AC = TC / Q
. Land = Rs.2 •Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility.5.
0.ECONOMIES OF SCALE
Capital Land Labour Output TC AC
•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 •Don’t get confused between Total Cost and Average Cost •Overall ‘costs’ will rise but unit costs can fall
MANAGERIAL ECONOMIES. MARKETING ECONOMIES. TECHNICAL ECONOMIES.CLASSIFICATION
ACCORDING TO MARSHALL
ECONOMIES OF SCALE . FINANCIAL ECONOMIES.
HIGH FIXED COST & CONSTANT MARGINAL COST.
LOW OR NO FIXED COST & DECLINING MARGINAL COST.2 WAYS TO ACHIEVE ECONOMIES OF SCALE.
600 per journey AC = Rs.1800 per journey AC = Rs. insurance.g.
PRINCIPLE OF BULK TRANSEKTION
Transport container = Volume of 20m3
Total Cost: Construction. driver.Increased Dimensions: e.30/m3
4m 4m 10m
Total Cost = Rs. road tax = 2m Rs. fuel.11.25/m3
Transport Container 2 = Volume 160m3
OF SCALE O’ OUT PUT
.LONG run economies of scale
ECO. OF SCALE
Economies of scale is a practical concept that is important for explaining real world phenomena such as: Patterns of international trade. returns to scale describe the relationship between inputs and outputs in a long-run production function. The number of firms in a market.ECONOMIES OF SCALE
1. Economies of scale refer to a firm's costs.
. Trading pattern. 3.
capital will be under-utilised leading to excess capacity and rising average total costs. Some large units of fixed capital may not be transferable to other uses if there is a sudden switch in consumer demand.POTENTIAL LIMITS
TO ECONOMIES OF
Market demand may be insufficient for businesses to fully exploit the scale economies.
. “Niche markets” allow smaller-scale producers to supply at higher cost because consumers are willing to pay a higher price. A business may expand beyond the optimal size in the long run and experience diseconomies of scale. Falling demand in a recession .
ECONOMIES OF SCOPE
In economies of scope. Sharing or joint utilization of inputs among similar products are the main reason for economies of scale.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.
. 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.
Globalization has made economies of scope even more important to firms in their production decisions.
.Economies of scope play an important role in firms decisions of what combination of goods to produce. Economies of scope have been realized in number of industries including FMCG. telecom & healthcare.
preparation facilities. 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. and so forth during production. This is because McDonalds hamburgers and French fries share the use of food storage.EG.
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.
Long term future of business
Economies of linked to benefits producing a wide products by utilizing the Operations.
. and is heavily based on the development of high technology. 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 firm’s other financial and operational ratios.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. Economies of scale is about the benefits gained by the production of large volume of a product.
COST ADVANTAGE FROM VOLUME STANDARDISATION
SAME PLANT OR EQUIPMENT PRODUCING MULTIPLE PRODUCTS.
Economies of Scope
Economies of Scale
COST ADVANTAGE FROM VARIETY PRODUCT DIVERSIFICATION WITHN SAME SCALE OF PLANT.