Economies of Scope

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DEFINITION of 'Economies of Scope'

An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced.

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BREAKING DOWN 'Economies of Scope'

For example, McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production.

Another example is a company such as Proctor & Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the costs are spread out, this lowers the average total cost of production for each product.

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RELATED FAQS
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    Real-world examples of economies of scope can be seen in mergers and acquisitions (M&A), newly discovered uses of resource ... Read Full Answer >>
  4. How valid is the notion of economies of scope?

    The concept of economies of scope is widely accepted in both managerial and theoretical economics. It proposes that it is ... Read Full Answer >>
  5. What is the difference between economies of scope and economies of scale?

    Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies ... Read Full Answer >>
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