economies of scope and scale

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ECONOMIES OF SCALE V/S ECONOMIES OF SCOPE PRESENTED BY, GAURAV H. NANJANI PGDBM. BATCH 09- 11 RIZVI MANAGEMENT INSTITUTE. BANDRA (w) MUMBAI

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Page 1: Economies of Scope and Scale

ECONOMIES OF SCALE

V/S ECONOMIES OF

SCOPEPRESENTED BY,

GAURAV H. NANJANI

PGDBM. BATCH 09-11

RIZVI MANAGEMENT INSTITUTE.

BANDRA (w) MUMBAI

Page 2: Economies of Scope and Scale

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.

Page 3: Economies of Scope and Scale

ECONOMIES OF

SCALE.

Page 4: Economies of Scope and 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.

Page 5: Economies of Scope and Scale

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

Page 6: Economies of Scope and Scale

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

Page 7: Economies of Scope and Scale

CLASSIFICATIONACCORDING TO MARSHALL

.ECONOMIES OF

SCALE

EXTERNAL ECONOMIES INTERNAL ECONOMIES

LABOUR ECONOMIES.TECHNICAL ECONOMIES.MANAGERIAL ECONOMIES.MARKETING ECONOMIES.FINANCIAL ECONOMIES.

Page 8: Economies of Scope and Scale

2 WAYS TO ACHIEVE ECONOMIES OF SCALE.

HIGH FIXED COST &

CONSTANT MARGINAL COST.

LOW OR NO FIXED COST &

DECLINING MARGINAL COST.

Page 9: Economies of Scope and Scale

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

Page 10: Economies of Scope and Scale

LONG run economies of scale

LAC

ECO. OF SCALE DIS-ECO. OF SCALE

OUT PUT

INR

O’O

Y

X

Page 11: Economies of Scope and Scale

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.

Page 12: Economies of Scope and Scale

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.

Page 13: Economies of Scope and Scale

ECONOMIES OF

SCOPE

Page 14: Economies of Scope and 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.

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.

Page 15: Economies of Scope and 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.

Page 16: Economies of Scope and Scale

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.

Page 17: Economies of Scope and Scale

ECONOMIST V/S

ENTREPRENEUR

Page 18: Economies of Scope and Scale

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 .

Page 19: Economies of Scope and Scale

Entrepreneur`s says the

economies of scope

helps in maximum

utilization of resources.

Economies of scope

helps in profit

maximization.

Page 20: Economies of Scope and Scale

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.

Page 21: Economies of Scope and Scale

Long term

future of

business

Expansion

Modernization

Diversification

Related Unrelated

Page 22: Economies of Scope and Scale

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

Page 23: Economies of Scope and 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

Page 24: Economies of Scope and Scale

THANK YOU