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
Forms Of Internal Economies
The principal types of internal economies are :
At the higher level of output, less labor (i.e. fewer resources or cost) per unit of output is required than it required at the smaller scale.
Scale of production Unit labour Req.
Economies of superior technique : Use of superior techniques and capital goods
Economies of linked processes : Linking of processes in a continuous sequence
Economies of By-products : Economical use of raw materials
When the size of the firm increases, the efficiency of management usually increases.
With the increasing scale of output, grater managerial economies are enjoyed by an expanding firm.
Economies of vertical integration
Economies of risk spreading
(i) Diversification of output
(ii) Diversification of market
Network Economies f scale
Forms Of Internal Economies .. Contd
External Economies of Scale
The lowering of a firm's costs due to external factors.
Outside the control of a firm
External economies of scale exist when the long-term expansion of an industry leads to the development of ancillary services which benefit all or the majority of suppliers in the industry
External economies partially explain the tendency for firms to cluster geographically
Good Examples to quote
External economies of scale occur when a firm benefits from lower unit costs as a result of the whole industry growing in size.
The main types are:
Transport and communication links improve
Training and education becomes more focused on the industry
Other industries grow to support this industry
Do economies of scale always improve the welfare of consumers?
Standardization of products
Lack of market demand
Developing monopoly power
PRINCIPLES RELATED TO ECONOMIES OF SCALE
Principle of bulk transaction
Principle of massed(pooled) transaction
Principle of multiples
PRINCIPLE OF BULK TRANSACTION
Cost of dealing with a large batch is not greater Cost dealing with a small batch
Cost per unit becomes lesser with large quantities.
Transport container 1
Transport container 2
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
Principle of massed reserve:
The larger the firm the greater the advantage.
Large firm has more departments hence overall demands for services will also be large.
Example: Transport services in a large firm.
Principle of multiples:
Principles of multiples is also been referred to as balancing of processes.
Machine A Machine B Machine C Capacity = 30 units per week Capacity = 1000 units per week Capacity = 400 units per week
The 6/10 Rule
Used to measure Economies of Scale
If we want to double the volume of the container…the material needed to make it will have to be increased by 6/10…i.e 60%
Diseconomies of Scale
The disadvantages of large scale production that can lead to increasing average costs
So what could cause costs to increase?
Causes of Diseconomies of scale
Problems of management – too many managers to control & lots of salaries to pay!
Maintaining effective communication – especially internationally – different languages
Co-ordinating activities – often across the globe!
De-motivation and alienation of staff
Divorce of ownership and control – do staff/managers care about the company?
Economies of Scope
What are economies of scope?
Measuring economies of scope
Real world examples
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
Economies of scope between cable TV and high speed internet service.
Production of timber and particle board.
Corn and ethanol production.
Production of beef and hides.
Power generation and distribution
Real world examples
Joint cargo and passenger transportation in airlines reduce excess capacity.
Global wholesale distribution of cheese, salad dressing, and
cigarettes (example: Phillip-Morris-Kraft).
Hotel Shalimar with various food items from same Kitchen.
Proctor and Gamble (P&G) with products from razors to toothpaste