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Economies of scope is an efficiency-enhancing notion that promotes cost-saving mechanisms from using similar operations to simultaneously manufacturing distinct products instead of going for one at a time. It occurs when the total cost of producing two or more output types is lower than the total cost of producing each output type separately.

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What are Economies of Scope?

An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently. In such a case, the long-run average and marginal cost of a company, organization, or economy decreases due to the production of complementary goods and services.

Why do economies of scope occur?

Economies of scope can occur because the products are co-produced by the same process, the production processes are complementary, or the inputs to production are shared by the products.

How does economies of scope differ from economies of scale?

Economies of scope differ from economies of scale, in that the former means producing a variety of different products together to reduce costs while the latter means producing more of the same good in order to reduce costs by increasing efficiency. Economies of scope can result from goods that are co-products or complements in production, ...

What are some examples of economic scope?

Real-world examples of the economy of scope can be seen in mergers and acquisitions (M&A), newly discovered uses of resource byproducts (such as crude petroleum), and when two producers agree to share the same factors of production.

How can an aerospace manufacturer reduce its overall cost?

The manufacturer can reduce its overall costs by obtaining low cost access to skilled labor, and the engineering school can reduce its instructional costs by effectively outsourcing some instructional time to the manufacturer's training managers. The final goods being produced (airplanes and engineering degrees) might not seem to be direct complements or share many inputs, but producing them together reduces the cost of both.

What is the economy of scope?

Economies of Scope is an efficiency-enhancing notion that promotes cost-saving from using similar operations to simultaneously manufacture distinct products instead of going for one at a time. It occurs when the total cost of producing two or more types of output is lower than the total cost of producing each type of output separately.

How to Determine Economies of Scope?

But, first, we need to consider the production possibility frontier Production Possibility Frontier The Production Possibility Frontier (PPF) is a visual representation used to illustrate the maximum possible output combinations of two separate products produced using the same amount of limited resources. read more (PPF).

What are some examples of economies of scope?

Examples of Economies of Scope 1 Many sectors are exploring ways to improve businesses using economies of scope, which we will explain with an example. 2 Apart from e-commerce, the banking sector is also capitalizing on economies of scope. Banks that have developed a robust IT infrastructure offer a plethora of services such as traditional banking, investment banking#N#Investment Banking Investment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc. read more#N#, credit card services, trading services, wealth management and mutual fund services. 3 After the initial set up of the IT infrastructure, the tech-savvy banks could provide so many services without incurring additional cost which would have arisen from arranging additional units for each service.

Is scale the same as economies of scope?

It is important to note that the concept of economies of scope and scale should not be treated as the same. The cost is reduced in economies of scope using similar resources to support large scale production of distinct goods. On the other hand, in the economies of scale, cost-saving flows from increasing the volume of a single product.

What Are Economies of Scope?

• An economy of scope means that the production of one good reduces the cost of producing another related good. Economies of scope occur when producing a wider variety of goods or services in tandem is more cost effective for a firm than producing less of a variety, or producing each good independently. In such a case, the long-run average and margin...

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