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What are Economies of Scope?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 September 2016
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Economies of scope have to do with the concept that the average total cost of production is influenced by the total units of different goods that are produced by a given business. This means that the production cost will begin to decrease as the number of individual units of each good produced are increased. The idea is that some of the resources used in the overall production process are relevant to more than one product and that sharing the cost of those processes among the different products will result in lower production costs per unit.

There is some similarity between economies of scale and economies of scope. Both involve attempting to make the most efficient use of available resources as a means of producing the most products for the lowest possible unit cost. What is different is that economies of scale are usually associated with the production of a single product, where economies of scope are focused on using some of the same resources and facilities to produce larger quantities of two or more products.

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One easy way to understand how economies of scope function is to consider the operation of a fast food restaurant. Since restaurants of this type will usually include a menu that offers a variety of selections, it is important to identify resources that can be used in the preparation of all those offerings, as well as in the promotion of the different menu items. By utilizing the same food preparation areas, some of the same ingredients, and even making use of the same advertising strategies to promote the menu items, the business can produce each item for a lower cost than trying to use separate resources to produce and promote each of those items. The end result is more efficient use of available resources, lower overall production costs, and a higher net profit for the restaurant owner.

An effective tool that helps to promote the efficiency of economies of scope is known as bundling or product association. Using the example of the fast food restaurant, the business may promote a special that includes a burger or sandwich coupled with a drink and a side order of French fries, a salad, or some other side item featured on the menu. The idea here is to create an offering that makes use of more than one product and entices the customer to choose that offering over ordering individual products. While this may reduce the actual profit from each unit sold, it may in fact increase sales volume. This can often allow the seller to make more efficient use of resources and offset the sales price difference with relative ease.

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burcidi
Post 3

@ysmina-- Yes, more profit and less risk. Economies of scope lead to more profit because having more products means reaching more consumers. A business also reduces risk through economies of scope, because if consumers don't like one product, the business will not go bankrupt because it has other products to fall back on. So the chance of success is greater.

Just to clarify though, there can be times when economies of scope disadvantage a business, such as when the costs of advertising different product become too much. This is called diseconomies of scope. So it's not enough for a business to produce multiple goods using the same resources, it also has to make wise decisions about advertisement, packaging, distribution, etc.

ysmina
Post 2

So what's the benefit of economies of scope for a business? More profit?

burcidi
Post 1

There is one major advantage of economies of scope that economies of scale doesn't have and that's variety for the consumers.

The problem with economies of scale is that businesses end up producing the same things, like the article mentioned, to cut costs. Economies of scope cut down on costs too, but without standardization and mass production. Mass production gives consumers only one or two types of products to choose from. I think that ultimately, this is bad for a business, because after a while, sales will start to go down.

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