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Economies of Scale and Scope
Economies of Scale and Scope
Horizontal Boundaries:
• Economies of Scale
• Economies of Scope
Economies of Scale
SAC
SAC
Q
increasing constant decreasing
returns to returns to returns to
scale scale scale
Economies of Scope
• exist when a firm expands the variety or
scope of its activities, e.g.,
– a lumber company sells chipped bark for lawn
decoration
– a finance company uses their financial data to
produce marketing reports
– a group of small firms shares a secretarial pool
– a slaughter house invents hot dogs
• and
Economies of Scope
• the relative costs of producing a variety of
goods and/or services in conjunction with
each other is lower than the costs of
producing the same set of goods and/or
services in isolation of one another
• Management Speak
– “leveraging core competencies”
– “competing on capabilities”
– “mobilizing invisible assets”
Economies of Scope
• mathematically
TC(Qx , Qy) TC(Qx ,0) TC(0, Qy)
• English
– “producing these products together is cheaper
than producing them separately”
Major sources of scope and scale
economies
Wheelbarrow
Cadillac
Q
Wheelbarrow Zone Cadillac Zone
Increasing variable input
productivity
• Economies of Scale through Specialization
– Opportunities for specialization often exist in
the production process at the plant level
• Road Kill Supply House
– driver
– scraper
• Economies of Scope
• Build a metal box under the hood of the Cadillac
and begin the cooking process using engine heat
Inventories
• Purchasing
• Marketing/Advertising
• Research and Development
Purchasing Economies –
Advantages
• Hold-up issues
– Purchaser of the inputs can increase strategic
importance of his orders by becoming a large
customer.
• Suppose you are a sock manufacturer in
Central Alabama. What action might
become “The best day and the worst day of
your business life?”
Marketing/Advertising
AC