Economies of Scope

Sometimes firms produce more than one output. The outputs could be closely linked to one another, as in case of a poultry farm, which produces both chicken and eggs. The outputs could be physically unrelated. In some cases, the production of one output yields by-products that could be valuable to the firm.

Production with Two Outputs: Economies of Scope

The firm is likely to enjoy production or cost advantages when it produces two or more outputs. Such economies /savings that arise on account of a single firm producing two or more outputs are known as ‘Economies of Scope’.

Thus, if a firm’s joint output is greater than the output that could be achieved by two different firms when each produces a single product, then its production process enjoys ‘Economies of Scale’.

These advantages occur on account of the joint use of inputs, processes and economies of management, technology, marketing and so on. The best example is of automobile companies that produce more than one product.

Product Transformation Curve

The situation of joint production of two commodities can be depicted through a Product Transformation curve. Such a curve shows the various combinations of the two different outputs that can be produced with a fixed amount of inputs. In the figure below, we have shown that an automobile company which produces both cars and buses.

The curve PT shows the various combinations of cars and buses that can be produced using a given amount of labour, capital and other inputs. The curve has a negative slope because in order to get more of one product, it needs to give up the production of the other product.

The curve is concave in shape, explaining the economies of scope in production. The concave shape explains the advantages of joint sharing of resources, management, and expertise, which leads to cost advantages.

If the production transformation curve is a straight line, then joint production would give no advantage. In such a case, an individual company producing only cars and other only buses would produce the same level of output as a single company producing both.

Diseconomies of Scope

When a firm’s joint output is less than that which could be produced by two separate firms, then its production process involves ‘diseconomies of scope’. The possibility occurs if the production of one product somehow conflicts with the production of the other.

Relationship Between Economies of Scale and Economies of Scope

A firm can reap economies of scope even when its production process is undergoing diseconomies of scale. There exists no direct relationship between economies of scale and economies of scope.

Suppose manufacturing a guitar and violin jointly is cheaper than producing both separately. This would mean economies of scope. But the production process involves highly skilled labour and is most economical if undertaken on a small scale. This explains a situation of ‘diseconomies of scale’.

Similarly, a joint-product firm can have economies of scale but not enjoy economies of scope. Let us consider a large business conglomerate which has several firms. If these firms produce efficiently on a large scale, then they enjoy economies of scale. But since they are administered separately, they are not able to enjoy ‘economies of scope.

Degree of Economies of Scope

The degrees of economies of scope (SC) are measured by the percentage of cost savings resulting when two or more products are produced jointly rather than individually.

C(Q1) represents the cost of producing output Q1, C(Q2) represents the cost of producing output Q2, and C(Q1, Q2) represents the joint cost of producing both outputs. The degrees of economies of scope can be represented as:

𝑺𝑪 = 𝑪 (𝑸𝟏) + 𝑪 (𝑸𝟐) − 𝑪(𝑸𝟏 , 𝑸𝟐) / 𝐂(𝐐𝟏 , 𝐐𝟐)

When the physical units of output can be added, as in the car-bus example, we can also write as C(Q1 + Q2). Due to economies of scope, the joint cost is less than the sum of individual costs. Therefore, SC will be greater than 0. When there are diseconomies of scope, SC will be negative. Thus, the larger the value of SC, the greater the economies of scope.

Read More- Microeconomics

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2. Methods of Analysis in Economics
3. Problem of Choice & Production Possibility Curve
4. Concept of Market & Market Mechanism in Economics
5. Concept of Demand and Supply in Economics
6. Concept of Equilibrium & Dis-equilibrium in Economics
7. Cardinal Utility Theory: Concept, Assumptions, Equilibrium & Drawbacks
8. Ordinal Utility Theory: Meaning & Assumptions
9. Indifference Curve: Concept, Properties & Shapes
10. Budget Line: Concept & Explanation
11. Consumer Equilibrium: Ordinal Approach, Income & Price Consumption Curve
12. Applications of Indifference Curve
13. Measuring Effects of Income & Excise Taxes and Income & Excise Subsidies
14. Normal Goods: Income & Substitution Effects
15. Inferior Goods: Income & Substitution Effects
16. Giffen Paradox or Giffen Goods: Income & Substitution Effects
17. Concept of Elasticity: Demand & Supply
18. Demand Elasticity: Price Elasticity, Income Elasticity & Cross Elasticity
19. Determinants of Price Elasticity of Demand
20. Measuring Price Elasticity of Demand
21. Price Elasticity of Supply and Its Determinants
22. Revealed Preference Theory of Samuelson: Concept, Assumptions & Explanation
23. Hicks’s Revision of Demand Theory
24. Choice Involving Risk and Uncertainty
25. Inter Temporal Choice: Budget Constraint & Consumer Preferences
26. Theories in Demand Analysis
27. Elementary Theory of Price Determination: Demand, Supply & Equilibrium Price
28. Cobweb Model: Concept, Theorem and Lagged Adjustments in Interrelated Markets
29. Production Function: Concept, Assumptions & Law of Diminishing Return
30. Isoquant: Assumptions and Properties
31. Isoquant Map and Economic Region of Production
32. Elasticity of Technical Substitution
33. Law of Returns to Scale
34. Production Function and Returns to Scale
35. Euler’s Theorem and Product Exhaustion Theorem
36. Technical Progress (Production Function)
37. Multi-Product Firm and Production Possibility Curve
38. Concept of Production Function
39. Cobb Douglas Production Function
40. CES Production Function
41. VES Production Function
42. Translog Production Function
43. Concepts of Costs: Private, Social, Explicit, Implicit and Opportunity
44. Traditional Theory of Costs: Short Run
45. Traditional Theory of Costs: Long Run
46. Modern Theory Of Cost: Short-run and Long-run
47. Modern Theory Of Cost: Short Run
48. Modern Theory Of Cost: Long Run
49. Empirical Evidences on the Shape of Cost Curves
50. Derivation of Short-Run Average and Marginal Cost Curves From Total Cost Curves
51. Cost Curves In The Long-Run: LRAC and LRMC
52. Economies of Scope
53. The Learning Curve
54. Perfect Competition: Meaning and Assumptions
55. Perfect Competition: Pricing and Output Decisions
56. Perfect Competition: Demand Curve
57. Perfect Competition Equilibrium: Short Run and Long Run
58. Monopoly: Meaning, Characteristics and Equilibrium (Short-run & Long-run)
59. Multi-Plant Monopoly
60. Deadweight Loss in Monopoly
61. Welfare Aspects of Monopoly
62. Price Discrimination under Monopoly: Types, Degree and Equilibrium
63. Monopolistic Competition: Concept, Characteristics and Criticism
64. Excess Capacity: Concept and Explanation
65. Difference Between Perfect Competition and Monopolistic Competition
66. Oligopoly Market: Concept, Types and Characteristics
67. Difference Between Oligopoly Market and Monopolistic Market
68. Oligopoly: Collusive Models- Cartel & Price Leadership
69. Oligopoly: Non-Collusive Models- Cournot, Stackelberg, Bertrand, Sweezy or Kinked Demand Curve
70. Monopsony Market Structure
71. Bilateral Monopoly Market Structure
72. Workable Competition in Market: Meaning and Explanation
73. Baumol’s Sales Revenue Maximization Model
74. Williamson’s Model of Managerial Discretion
75. Robin Marris Model of Managerial Enterprise
76. Hall and Hitch Full Cost Pricing Theory
77. Andrew’s Full Cost Pricing Theory
78. Bain’s Model of Limit Pricing
79. Sylos Labini’s Model of Limit Pricing
80. Behavioural Theory of Cyert and March
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82. Prisoner’s Dilemma: Concept and Example