Economies of Scope

Economies

1. ECONOMIES OF SCOPE HEMANT GUPTA MBA/45007/19 HARSH SINGH MBA/45010/19

2. An economy of scope means that the production of one good reduces the cost of production of the related goods. It describes situations when producing two or more goods or services together results in a lower costs than producing them separately. INTRODUCTION

3. Co- products or complementary in production Have c omplementary production process Can s hare inputs for production ECONOMIES OF SCOPE CAN RESULT FROM GOODS THAT ARE:

4. Economies of scope can arise from co- production relationships between the final products. This is when production of one good automatically produces another good as a bi-product or a kind of side- effect of the production process. CO- PRODUCTS

5. For example: Dairy farmers separate milk into whey and curd with the curd going on to become cheese. In the process they also end up with a lot of whey, which they can use as a high protein feed for livestock to reduce their feed costs or sell as a nutritional product to fitness enthusiasm and weightlifters for additional revenue.

6. Economies of scope can result from direct interaction of the production processes. Companion planting in agriculture is a classic example here, such as the three sisters historically formed by native Americans. By planting corn, pole beans, and ground trailing squash together, the three sisters method can increase the yield of each crop, while also improving the soil. COMPLEMENTARY PRODUCTION PROCESS:

7. Production inputs(land, labour and capital) usually have more than one use, economies of scope can often come from common inputs to the production of two or more different goods . For example:- A restaurant can produce both chicken fingers and f rench fries at a lower average expense than what it would cost two separate firms to produce each of the goods separately. This is because chicken fingers and french fries can share the use of the same cold storage, fryers and cooks during production. SHARED INPUTS

8. Flexible manufacturing : A company’s ability to quickly and effectively switch manufacturing process to produce new products can lead to economies of scope. The cost of switching is low and multiple products can be produced using the same resources. Diversification : A company’s operational expertise and specialization can be applied to other products within the organization. HOW TO ACHIEVE ECONOMY OF SCOPE

9. For instance, Procter and Gamble is able to produce a wide range of products because they can afford higher marketers or designers who can use the skill across products line spreading out the product cost to many products lower the cost of production of each one . Mergers : Sharing of research & development expenses help drive down costs and allow diverse portfolios of knowledge and products to be established.

10. Supply chain: Linking the supply chain ad allowing cross- over communication between wholesalers, distributors, etc. arises the ability to eliminate costs. It is less expensive to have businesses operate their supply chain initiative same umbrella rather than to operate independently.

11. S.C= C(Q1) + C(Q2) – C(Q1Q2) C(Q1,Q2) C(Q1) represents the cost of producing output Q1, C(Q2) represent the cost of producing output Q2 and C(Q1,Q2) represent the cost of producing both outputs. Due to economies of scope, the joint cost is less than the sum of individual costs. DEGREES OF ECONOMIES OF SCOPE

12. ECONOMIES OF SCALE V/S ECONOMIES OF SCOPE Economies of scale This saves the cost of production beyond a certain point. Reduces the cost of one product. Its about producing one type of product in bulk Reduction due to Bulk in production Example: Production of one type of smart phones in huge quantities Economies of Scope This also saves the cost of production if a company produces varieties of products Reduces the cost of multiple products Its about producing multiple products under same operation Reduction due to variety in production Example: Production of multiple food items by using same resources.

13. In Paper industry : In the paper industry it is common for large firms to produce their own pulp, the primary ingredient in paper, before manufacturing the paper goods themselves. However, smaller firms may have to purchase pulp from others at a higher net cost than the large companies pay. The savings from producing both pulp and paper would be an economy of scope for the large production. EXAMPLES OF ECONOMIES OF SCOPE

14. Banks have economies of scope when they offer multiple financial services at one place. Offering checking accounts, loans and investment services together allows a bank to spread the cost of its branches, staff, A.T.M, and its internet site over all products instead of having a separate infrastructure for each product. ECONOMIES OF SCOPE IN BANKING INDUSTRY

15. SBI provides multiple financial services at one place only like. Acceptance of deposits(on term or at demand etc.) with or without the interest rate. Purchase and sale of money (Including foreign currency exchange) Advancement of loan. Opening and management of account. Providing services of keeping cashing and transportation of money and values. A ll these such services are provide at one place only. Through this SBI is able to minimize the cost of providing services to the consumer and this helps in profit maximization. REAL LIFE EXAMPLE

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