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.

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. Marginal Rate of Technical Substitution

    The rate at which one factor has to be decreased in order to ...
  5. Absolute Advantage

    The ability of a country, individual, company or region to produce ...
  6. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
Related Articles
  1. Economics

    Economics Basics

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

    What Are Economies Of Scale?

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

    What Is The Labor Market Conundrum?

    We are facing a conundrum with investment implications: Why are wages still stagnant, when jobs are being created at the fastest pace since the late 90's?
  4. Economics

    Understanding Impairment

    In finance and accounting, impairment refers to the loss of value of a company’s capital stock.
  5. Economics

    What is a Promissory Note?

    A written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
  6. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  7. Personal Finance

    Why Are Tesla Cars So Expensive?

    What makes Tesla cars so expensive? Short supply and pricey parts is a good place to start.
  8. Economics

    What is M1?

    M1 is a measurement of money supply that includes all hard currency, plus demand deposits such as checking accounts.
  9. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?
  10. Investing

    Opportunity Cost

    Every action has a cost, even the ones you don't pursue. Find out how this is calculated.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center