Economies of Scope

AAA

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Pareto Analysis

    A technique used for decision making based on the Pareto Principle, ...
  3. Economics

    A social science that studies how individuals, governments, firms ...
  4. Horizontal Merger

    A merger occurring between companies in the same industry. Horizontal ...
  5. Factor Market

    A marketplace for the services of a factor of production.
  6. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to ...
RELATED FAQS
  1. How does a company decide whether it is in a position to diversify its offerings, ...

    A company decides whether it is in a position to diversify its offerings based on economies of scope through an analysis ... Read Full Answer >>
  2. How can a nation adopt an export policy based on the economies of scope?

    A nation as a whole can adopt an export policy based on the economies of scope by focusing production on goods and services ... Read Full Answer >>
  3. What are some real-life examples of the economies of scope?

    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 >>
  6. What are the key barriers to entry for companies in the electronics sector?

    The electronics industry includes consumer electronics, specialized electronics for other industries and component parts ... Read Full Answer >>
Related Articles
  1. Economics

    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. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Economics

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  4. Stock Analysis

    The Top Performing Airlines Right Now

    Learn about the airline industry and its top-performing companies. Understand these top-emerging airlines and why they have taken more market share.
  5. Economics

    Understanding the Product Life Cycle

    Product life cycle is the period of time during which a product is conceived and developed, brought to market and eventually removed from the market.
  6. Economics

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.
  7. Economics

    Explaining Aggregate Supply

    Aggregate supply is the total supply of goods and services an economy produces in a given time period.
  8. Economics

    What Does Inferior Good Mean?

    The term “inferior good” does not describe a lack of quality, but rather, is an economic term used when discussing elasticity of demand for a good.
  9. Economics

    What Is a Giffen Good?

    A Giffen good is a product whose demand increases as its price increases, and falls when its price falls.
  10. Economics

    What Does Going Concern Mean?

    Going concern is a concept used in business and accounting to describe the fiscal health of a company.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!