PROJECT: Economies Of Scale and Economies Of Scope SUBJECT: Managerial Economics GROUP MEMBERS: Madhura Donde (10) Nadeem Ahmad Khan (19) Faisal Memon (29) Nuzhat Memon (30) Farhan Roshan (39) Shazia Shaikh (49) Anju Yadav (60) PROFESSOR: Mr. M.P. REGE ANJUMAN-I-ISLAM’S ALLANA INSTITUTE OF MANAGEMENT STUDIES
ECONOMIES OF SCALE Economies of scale are the cost advantages that a business can exploit by expanding their scale of production in the long run.
Marshall classified the economies of large scale production into two types:
Internal economies are open to an individual firm when its size expands
Internal economies are the function of the size of a firm
Example: Volume of the container utilised 30m 3 Total Cost: Construction, driver, fuel, maintenance, insurance, road tax = Rs.600 per journey AC = Rs.20/m 3 Volume utilised 160m 3 Total Cost : Rs.1800 per journey AC = Rs.11.25/m 3
Economies of Scope This is an extension of the concept of economies of scale to the Multi Product Case If a single firm can jointly produce goods X and Y more economically than any combination of firms could produce them separately, then the production of X and Y is characterized by Economies Of Scope.
Modernisation Diversification i)Related ii)Unrelated Expansion Long term growth and development of business
Economies of scope can be measured by as follows: Where C(Q 1 ,Q 2 ) is the cost of jointly producing goods 1 and 2 in the respective quantities; C(Q 1 ) is is the cost of producing good 1 alone, and similarly for C(Q 2 ). Example: Let C(Q 1 ) = $12 million; C(Q 2 ) = $8 million; and C(Q 1 ,Q 2 ) = $17 million. Thus: Thus joint production of goods 1 and 2 would result in a 15 percent reduction in total costs
Economies of scope arise from “Complementaries” in the production or distribution of distinct goods or services