economies of scope and scale
TRANSCRIPT
ECONOMIES OF SCALE
V/S ECONOMIES OF
SCOPEPRESENTED 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 SCALECapital Land Labour Output TC AC
Scale A 5 3 4 100
Scale B 10 6 8 300
•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
Capital Land Labour Output TC AC
Scale A 5 3 4 100 57 0.57
Scale B 10 6 8 300 164 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•Don’t get confused between Total Cost and Average Cost•Overall ‘costs’ will rise but unit costs can fall
ECONOMIES OF SCALE
CLASSIFICATIONACCORDING 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
5m
2m
2m
Transport container = Volume of 20m3
Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = Rs.600 per journeyAC = Rs.30/m3
4m
10m
4m
Transport Container 2 = Volume 160m3
Total Cost = Rs.1800 per journeyAC = Rs.11.25/m3
LONG run economies of scale
LAC
ECO. OF SCALE DIS-ECO. OF SCALE
OUT PUT
INR
O’O
Y
X
ECONOMIES OF SCALE
&GLOBALIZATION
Economies of scale is a practical concept that is important for explaining real world phenomena such as:
1. Patterns of international trade. 2. The number of firms in a market. 3. 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
Economies of scope only
applies to certain industries, it
can not be applied to all the
sectors.Economist also says that
economies of scope is
exploitation of resources .
Entrepreneur`s says the
economies of scope
helps in maximum
utilization of resources.
Economies of scope
helps in profit
maximization.
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
Expansion
Modernization
Diversification
Related Unrelated
ECONOMIES OF SCOPE V/S 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 scope is linked to benefits gained by producing a wide variety of products by efficiently utilizing the same Operations.
“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 scale is about the benefits gained by the production of large volume of a product.
Economies of Scope Economies of Scale
CONTINUED.
COST ADVANTAGE FROM VARIETY
PRODUCT DIVERSIFICATION WITHN SAME SCALE OF PLANT.
SAME PLANT OR EQUIPMENT PRODUCING MULTIPLE PRODUCTS.
COST ADVANTAGE FROM VOLUME
STANDARDISATION
LARGER PLANT
Economies of Scope Economies of Scale
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