A:

Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies of scope focuses on the average total cost of production of a variety of goods, whereas economies of scale focuses on the cost advantage that arises when there is a higher level of production of one good.

The theory of economies of scope states that the average total cost of a company's production decreases when there is an increasing variety of goods produced. Economies of scope give a cost advantage to a company when it produces a complementary range of products while focusing on its core competencies.

For example, company ABC is the leading desktop computer producer in the industry. Company ABC wants to increase its product line and remodels its manufacturing building to produce a variety of electronic devices, such as laptops, tablets, and phones. Since the cost of operating the manufacturing building is spread out across a variety of products, the average total cost of production decreases. The costs of producing each electronic device in another building would be greater than just using a single manufacturing building to produce multiple products.

Conversely, economies of scale offer a cost advantage when there is an increased output of a good or service. Economies of scale arise due to the inverse relationship between the average cost per unit and output level. Economies of scale focus on the output level of one product, whereas economies of scope focus on the variety of products offered.

For example, suppose a shoe company only has fixed costs of $10,000 a month and only offers one design of shoes. If the shoe manufacturer only produces one shoe, the average total cost of the product is $100,000. However, if it increases it output level to 10,000 shoes per month, the average total cost of the product to $1 per unit ($10,000/10,000). Economies of scale arise for this company as it increases its production level of shoes.

RELATED FAQS
  1. What are some real-life examples of the economies of scope?

    Read about some real world examples of economies of scope, why it's an important concept and how to distinguish it from economies ... Read Answer >>
  2. What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and ... Read Answer >>
  3. How can a nation adopt an export policy based on the economies of scope?

    Discover how a nation as a whole can adopt an export policy based on the economies of scope. Economies of scope take advantage ... Read Answer >>
  4. How does volume relate to economies of scale?

    Learn about economies of scale and how the volume of output produced is inversely related to costs and related to economies ... Read Answer >>
  5. What are some advantages of a market economy over other types of economies?

    Learn what a market economy is, the main assumption behind a market economy and some important advantages a market economy ... Read Answer >>
  6. How is break-even analysis affected by economies of scale?

    Learn what economies of scale are, how they affect total cost and how they affect the break-even point of a company. Read Answer >>
Related Articles
  1. Small Business

    Explaining Economies of Scope

    Economies of scope is a theory that says that an increase in the variety of goods produced results in a decrease in the average cost of production.
  2. Small Business

    What Are The Differences Between Internal And External Economies Of Scale?

    Internal economies of scale are firm specific. External economies of scale occur due to large changes outside of a firm that usually impact an entire industry.
  3. Insights

    Explaining Minimum Efficient Scale

    Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.
  4. Insights

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  5. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  6. Investing

    Explaining Economies Of Scale

    Is bigger always better? Learn about the important and often misunderstood concept of economies of scale.
  7. Insights

    The Shoe Lover's Investment Portfolio

    These stocks are worth a look if you love footwear.
  8. Investing

    The Economics Behind Designer Heels (TWX, MC)

    Discover the factors and trends that impact the rising cost of designer heels. The cost of materials pushes the cost of designer brands up to $5,000 per pair.
  9. Insights

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  10. Managing Wealth

    Is Pressing The Trade Just Pressing Your Luck?

    Scaling up into a trade can be a lucrative strategy, but you need to understand the risks involved.
RELATED TERMS
  1. Economies of Scope

    An economic theory stating that the average total cost of production ...
  2. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased ...
  3. Marginal Cost Of Production

    The change in total cost that comes from making or producing ...
  4. Minimum Efficient Scale

    The smallest amount of production a company can achieve while ...
  5. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  6. Scope

    A project management term for the combined objectives and requirements ...
Hot Definitions
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  2. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  3. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
Trading Center