The economy of scale and scope were two critical notions discussed in this week's reading; they
are also two concepts that I deeply fancy and experience as I work in Supply Chain. According to
the "economy of scope" theory, when a corporation produces a broader range of products, it may
do so at a lower overall cost. When a business focuses on its strengths while producing a diverse
variety of goods, it may reap the financial benefits of economies of scope (Nickolas, 2023). Due
to its seeming incongruity with specialization and scale economies, the notion of economy of
scope often needs to be understood. The economy of scope can be understood by imagining that
it would be more cost-effective for two goods to share the same resource inputs rather than for
each product to have its own set of inputs. Mergers and acquisitions, finding novel applications
for resource outputs, and the agreement between two producers to share the same production
inputs are all instances of economies of scope in action. The term "economy of scale" refers to
the reduction in per-unit production costs that result from increasing output. The firm's fixed
costs per unit are inversely proportional to the scale at which its output increases (Nickolas,
2023). In most cases, the marginal cost of manufacturing each extra computer processor reduces
after the fixed expenses have been recovered. With diminishing marginal costs, selling more
products means making more money. It allows businesses to lower prices if they need to, making
their wares more competitive. Significant things may be packaged and sold in bulk at warehouse
clubs like Costco and Sam's Club because of economies of scale. While economies of scale may
appear advantageous, they do have their limitations. Marginal costs rarely go down forever. At
some point, economies of scale may be a minor factor due to the sheer size of the enterprise
(Nickolas, 2023), which compels businesses to innovate, increase their working capital, or
maintain their current high output level.
References
Froeb, L. M., McCann, B. T., Ward, M. R., Shor, M. (2017, October 18). Managerial Economics
(5th ed.). Cengage Learning.
Nickolas, S. (2023, August 20). Economies of Scope vs. Economies of Scale: What's the
Difference? Investopedia.
https://www.investopedia.com/ask/answers/042215/what-difference-
between-economies-scope-and-economies-scale.asp
