What are Economies of Scope?

Economies of scope refer to lowering the average cost of goods and services by producing different products simultaneously. It is different from economies of scale where producing large quantity of products could decrease of average cost of production. In the case of economies of scope, cost reduction can be achieved by producing more types of products rather than quantities of a single product. For example, McDonalds achieve cost efficiency from producing both French fries and hamburgers. The costs of production is reduced because french fries and hamburgers share inputs such as food storage, labor, and other production factors.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

How Economies of Scope Work

Large firms aiming to achieve economies of scope attempt to cut their cost and achieve operational efficiency through a diversification strategy. The company may achieve efficiencies by producing complementary goods and services. This allows the company to reduce the average and marginal cost in the long run. Complementary goods can be described as goods whose use depends upon other goods. The company may also produce same product in different varieties for its ends users. For example, Proctor and Gamble used diversification strategy for its simple paper product by expanding its product line to numerous ends user such as consumer and hospital to achieve economies of scope. Another way to achieve economies of scope is by merging or acquiring another company. Merging or acquiring another company enables the company to combine different product lines which diminishes their marginal and average cost. Benefits of economies of scope, aside from operational efficiencies include: new customer acquisition and retention and reduced product line risk.

Related Topics

• Law of Diminishing Marginal Returns
• Marginal Analysis
• Short Run
• Long-Run Average Cost (LRAC)
• Long-Run Average Supply (LRAS)
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Tournament Theory
• Marginal Revenue Product 
• Derived Demand
• Marginal Input Cost  
• Economic Rent
• Productivity and Learning Curve
• Experience Curve
• Acceleration Principle