Question

1. Describe activities in your organization or other organizations that result in economies of scale and economies of scope.

2. Explain the economic benefits of these activities for the organization.

Answer 1

Economies of scale refers to lowering per unit cost of production by inscreasing scale of production by increasing output. Activities that result in economies of scale are: bulk purchasing due to increased prodution, spreading advertising costs over more units produced, increasing managerial and worker efficiency by increasing specilization, lower costs of credit by having better access to credit markets and better terms of credit (for example, lower interest rates) because of larger size, lowering costs by better automation in larger production processes, and improved efficiencies in storage, transportation and deliveries.

Economies of scope arise by inreasing types of products produced and sold, that is by expanding product lines. These can rise by cross-selling, co-branding (thus lowering promotion, advertising and marketing expenditures per unit), increasing product ranges, etc.

Economies of scale lower per unit cost and make a firm more competitive in its market place, thereby increasing revenues and profits.

Economies of scope reduce risk, provide diversification, increase ability to respond better to changing market conditions, provide flexibility in product mix and product design, reduce waste, etc. They make a firm more competitive, innovative and better able to manage and improve its position in the market, thereby increasing revenues and profits.