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.

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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