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Economies of scale & scope


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Economies of scale & scope

  1. 1. 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
  2. 2. 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.
  3. 3. Marshall classified the economies of large scale production into two types: <ul><li>Internal Economies </li></ul><ul><li>External Economies </li></ul><ul><li>INTERNAL ECONOMIES </li></ul><ul><li>Internal economies are open to an individual firm when its size expands </li></ul><ul><li>Internal economies are the function of the size of a firm </li></ul>
  4. 4. Forms Of Internal Economies <ul><li>The principal types of internal economies are : </li></ul><ul><li>Labour </li></ul><ul><li>Technical </li></ul><ul><li>Managerial </li></ul>
  5. 5. Labour Economies <ul><li>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. </li></ul>Scale of production Unit labour Req.
  6. 6. Technical Economies <ul><li>Economies of superior technique : Use of superior techniques and capital goods </li></ul><ul><li>Economies of linked processes : Linking of processes in a continuous sequence </li></ul><ul><li>Economies of By-products : Economical use of raw materials </li></ul>
  7. 7. Managerial Economies <ul><li>When the size of the firm increases, the efficiency of management usually increases. </li></ul><ul><li>With the increasing scale of output, grater managerial economies are enjoyed by an expanding firm. </li></ul>
  8. 8. <ul><li>Marketing Economies </li></ul><ul><li>Economies of vertical integration </li></ul><ul><li>Financial economies </li></ul><ul><li>Economies of risk spreading </li></ul><ul><ul><li>(i) Diversification of output </li></ul></ul><ul><ul><li>(ii) Diversification of market </li></ul></ul><ul><li>Network Economies f scale </li></ul>Forms Of Internal Economies .. Contd
  9. 9. External Economies of Scale <ul><li>The lowering of a firm's costs due to external factors. </li></ul><ul><li>Outside the control of a firm </li></ul><ul><li>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 </li></ul><ul><li>External economies partially explain the tendency for firms to cluster geographically </li></ul><ul><li>Good Examples to quote </li></ul>
  10. 10. External economies of scale occur when a firm benefits from lower unit costs as a result of the whole industry growing in size. <ul><li>The main types are: </li></ul><ul><li>Transport and communication links improve </li></ul><ul><li>Training and education becomes more focused on the industry </li></ul><ul><li>Other industries grow to support this industry </li></ul>
  11. 11. Do economies of scale always improve the welfare of consumers? <ul><li>Standardization of products </li></ul><ul><li>Lack of market demand </li></ul><ul><li>Developing monopoly power </li></ul>
  12. 12. PRINCIPLES RELATED TO ECONOMIES OF SCALE <ul><li>Principle of bulk transaction </li></ul><ul><li>Principle of massed(pooled) transaction </li></ul><ul><li>Principle of multiples </li></ul>
  13. 13. PRINCIPLE OF BULK TRANSACTION <ul><li>Implication: </li></ul><ul><li>Cost of dealing with a large batch is not greater Cost dealing with a small batch </li></ul><ul><li>Cost per unit becomes lesser with large quantities. </li></ul>
  14. 14. <ul><li>Transport container 1 </li></ul><ul><li>Transport container 2 </li></ul>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
  15. 15. Principle of massed reserve: <ul><li>The larger the firm the greater the advantage. </li></ul><ul><li>Large firm has more departments hence overall demands for services will also be large. </li></ul><ul><li>Example: Transport services in a large firm. </li></ul>
  16. 16. Principle of multiples: <ul><li>Principles of multiples is also been referred to as balancing of processes. </li></ul>Machine A Machine B Machine C Capacity = 30 units per week Capacity = 1000 units per week Capacity = 400 units per week
  17. 17. The 6/10 Rule <ul><li>Used to measure Economies of Scale </li></ul><ul><li>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% </li></ul>
  18. 18. Diseconomies of Scale <ul><li>The disadvantages of large scale production that can lead to increasing average costs </li></ul>So what could cause costs to increase?
  19. 19. Causes of Diseconomies of scale <ul><ul><li>Problems of management – too many managers to control & lots of salaries to pay! </li></ul></ul><ul><ul><li>Maintaining effective communication – especially internationally – different languages </li></ul></ul><ul><ul><li>Co-ordinating activities – often across the globe! </li></ul></ul><ul><ul><li>De-motivation and alienation of staff </li></ul></ul><ul><ul><li>Divorce of ownership and control – do staff/managers care about the company? </li></ul></ul>
  20. 20. Economies of Scope <ul><li>What are economies of scope? </li></ul><ul><li>Measuring economies of scope </li></ul><ul><li>Real world examples </li></ul>
  21. 21. 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.
  22. 22. Modernisation Diversification i)Related ii)Unrelated Expansion Long term growth and development of business
  23. 23. 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
  24. 24. Economies of scope arise from “Complementaries” in the production or distribution of distinct goods or services
  25. 25. <ul><li>Economies of scope between cable TV and high speed internet service. </li></ul><ul><li>Production of timber and particle board. </li></ul><ul><li>Corn and ethanol production. </li></ul><ul><li>Production of beef and hides. </li></ul><ul><li>Power generation and distribution </li></ul>Real world examples
  26. 26. <ul><li>Joint cargo and passenger transportation in airlines reduce excess capacity. </li></ul><ul><li>Global wholesale distribution of cheese, salad dressing, and </li></ul><ul><li>cigarettes (example: Phillip-Morris-Kraft). </li></ul><ul><li>Hotel Shalimar with various food items from same Kitchen. </li></ul><ul><li>Proctor and Gamble (P&G) with products from razors to toothpaste </li></ul>Real world examples
  27. 27. <ul><li>Owns 250 different product ranges </li></ul>Proctor & Gamble
  28. 28. AMUL – The Taste Of India
  29. 29. Economies of Scale v/s Economies of Scope <ul><li>Definition </li></ul><ul><li>Benefits </li></ul><ul><li>Efficiency </li></ul>
  30. 30. Thank You