economies of scale & scope
TRANSCRIPT
PROJECT: Economies Of Scale and Economies Of Scope
SUBJECT: Managerial Economics
GROUP MEMBERS: Madhura Donde (10) Nadeem Ahmad Khan (19) Faisal Memon (29) Nuzhat Memon (30) Farhan Roshan (39) Shazia Shaikh (49) Anju Yadav (60)
PROFESSOR: Mr. M.P. REGE
ANJUMAN-I-ISLAM’SALLANA INSTITUTE OF MANAGEMENT STUDIES
ECONOMIES OF SCALE
Economies of scale are the cost advantages that a business can exploit by expanding their scale of production in the long run.
Marshall classified the economies of large scale production into two types:
Internal Economies External Economies
INTERNAL ECONOMIES Internal economies are open to an
individual firm when its size expands Internal economies are the function of the
size of a firm
Forms Of Internal Economies
The principal types of internal economies are : Labour
Technical
Managerial
Labour Economies At the higher level of
output, less labor (i.e. fewer resources or cost) per unit of output is required than it required at the smaller scale.
Scale of production
Unit labour Req.
Technical Economies
Economies of superior technique : Use of superior techniques and capital goods
Economies of linked processes : Linking of processes in a continuous sequence
Economies of By-products : Economical use of raw materials
Managerial EconomiesWhen the size of the firm increases, the
efficiency of management usually increases.
With the increasing scale of output, grater
managerial economies are enjoyed by an expanding firm.
Marketing Economies
Economies of vertical integration
Financial economies
Economies of risk spreading
(i) Diversification of output(ii) Diversification of market
Network Economies f scale
Forms Of Internal Economies .. Contd
External Economies of Scale The lowering of a firm's costs due to external factors. Outside the control of a firm External economies of scale exist when the long-term
expansion of an industry leads to the development of ancillary services which benefit all or the majority of suppliers in the industry
External economies partially explain the tendency for firms to cluster geographically
Good Examples to quote
External economies of scale occur when a firm benefits from lower unit costs as a result of the wholeindustry growing in size.
The main types are: Transport and communication links improve Training and education becomes more
focused on the industry Other industries grow to support this industry
Do economies of scale always improve the welfare of consumers?
Standardization of products
Lack of market demand
Developing monopoly power
PRINCIPLES RELATED TO ECONOMIES OF SCALE
Principle of bulk transaction
Principle of massed(pooled) transaction
Principle of multiples
PRINCIPLE OF BULK TRANSACTION
Implication: Cost of dealing with a large batch is not greater Cost dealing with a small batch
Cost per unit becomes lesser with large quantities.
Transport container 1 Transport container 2
Example:
Volume of the container utilised 30m3
Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = Rs.600 per journeyAC = Rs.20/m3
Volume utilised 160m3
Total Cost : Rs.1800 per journeyAC = Rs.11.25/m3
Principle of massed reserve: The larger the firm the greater the
advantage. Large firm has more departments hence
overall demands for services will also be large.
Example: Transport services in a large firm.
Principle of multiples: Principles of multiples is also been referred to as balancing of processes.
Machine A Machine B Machine CCapacity = 30 units per week
Capacity = 1000 units per week
Capacity = 400 units per week
The 6/10 Rule
Used to measure Economies of Scale
If we want to double the volume of the container…the material needed to make it will have to be increased by 6/10…i.e 60%
Diseconomies of Scale The disadvantages of large scale production that can
lead to increasing average costs
So what could cause costs to increase?
Causes of Diseconomies of scaleProblems of management – too many managers to
control & lots of salaries to pay!Maintaining effective communication – especially
internationally – different languagesCo-ordinating activities – often across the globe!De-motivation and alienation of staff Divorce of ownership and control – do staff/managers
care about the company?
Economies of Scope
What are economies of scope?
Measuring economies of scope
Real world examples
Economies of Scope
This is an extension of the concept of economies of scale to the Multi Product Case
If a single firm can jointly produce goods X and Y more economically than any combination of firms could produce them separately, then the production of X and Y is characterized by Economies Of Scope.
ModernisationDiversificationi)Relatedii)Unrelated
Expansion
Long term growth and
development of business
)()(),()()(
21
2121
QCQCQQCQCQCSC
Economies of scope can be measured by as follows:
Where C(Q1,Q2) is the cost of jointly producing goods 1 and 2 in the respective quantities; C(Q1) is is the cost of producing good 1 alone, and similarly for C(Q2).
Example: Let C(Q1) = $12 million; C(Q2) = $8 million; and C(Q1,Q2) = $17 million. Thus:
15.20$3$
8$12$17$8$12$
SC
Thus joint production of goods 1 and 2 would result in a 15 percent reduction in total costs
Economies of scope arise from “Complementaries” in
the production or distribution of distinct goods or services
Economies of scope between cable TV and high speed internet service.
Production of timber and particle board.
Corn and ethanol production.
Production of beef and hides.
Power generation and distribution
Real world examples
Joint cargo and passenger transportation in airlines reduce excess capacity.
Global wholesale distribution of cheese, salad dressing, and
cigarettes (example: Phillip-Morris-Kraft).
Hotel Shalimar with various food items from same Kitchen.
Proctor and Gamble (P&G) with products from razors to toothpaste
Real world examples
Owns 250 different product ranges
Proctor & Gamble
AMUL – The Taste Of India
Economies of Scale v/s Economies of Scope
Definition
Benefits
Efficiency
Thank You