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Economies of Scale vs. Economies of Scope

Updated on January 28, 2024
Article bySayantan Mukhopadhyay
Reviewed byDheeraj Vaidya, CFA, FRM

Economies of Scale and Economies of Scope Differences

Economies of scale are applied in businesses for a longer period. It takes place when an organization reaches a point where its production costs start to lower, and it happens in the cases of bulk production. In contrast, economies of scope happen when an organization produces multiple varieties of products, and as a result, its cost of production starts to reduce.

Both are concepts of economics. And they both are very useful to a business that wants to grow and serve its customers better.

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Economies of scale have been applied in businesses for a very long time. On the other hand, economies of scope is a comparatively newer approach in business economicsBusiness EconomicsBusiness Economics defines the economic issues faced by an entity. It determine how much is the impact of a certain change in an economic factor on the profitability or revenues of a given business and uses this analysis in steering the firm’s decision-making.read more and strategy. Both facilitate in reducing the cost of production for businesses. In this article, we will go through each of these concepts in detail and then do a comparative analysis between them.

Key Takeaways

  1. Economies of scale save the cost of production up till one point. Economies of scope, on the other hand, refer to saving the cost of production when a company produces various kinds of goods. 
  2. Economies of scale is a relatively older concept, whereas economies of scope is a newer concept being used by businesses recently. 
  3. Economies of scale focus on the standardization of products, whereas economies of scope target the diversification of products. 
  4. Companies decide on scope or scale based on the core. Multiple projects suggest economies of scope, whereas a single project in bulk suggests economies of scale. 

Economies of Scale vs. Economies of Scope Infographics

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Economies of Scale vs Economies of Scope Video

Key Differences

  • Economies of scale are all about increasing the units of production. Economies of scope are all about increasing the varieties of production.
  • Economies of scale help a company look at the average cost per unit and gradually increase the quantity until this cost reaches a minimum. Economies of scope are all about utilizing the infrastructure to reduce the average cost per unit.
  • Economies of scale concentrate on only one type of product. Economies of scope concentrate on varieties of products.
  • Economics of scale depends more on the production capacity of one product. Economics of scope depends more on the company’s infrastructure to produce multiple products under one head.
  • Economics of scale is a relatively older concept. Economics of scope is a comparatively newer concept.

Comparative Table

Basis for Comparison Economies of ScaleEconomies of Scope
1. MeaningSaves the cost of production beyond a certain point.This also saves the cost of production if a company produces a variety of products.
2. Reduces the cost of One product.Multiple products.
3. It’s about Producing one type of product in bulk.Producing multiple products under the same operation.
4. Reduction due toBulk production.Varieties in production.
5. Old/newRelatively older concept and is used everywhere.Comparatively newer concept and is recently being used by businesses.
6. Strategy behindStandardization of product.Diversification of products.
7. UsesA huge amount of resources since the production happens in bulk.A lot fewer resources because under one operation multiple products are produced.
8. ExampleProduction of one type of smartphone in huge quantities.Production of multiple food items by using the same resources.

Conclusion

As a business, understanding and using both of these concepts can be beneficial. But it is better that as a business you use these two prudently. You need to know where to use economies of scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. read more and economies of scope.

If you are already selling five products under the head of your company, trying to achieve economies of scale isn’t a sagacious decision. Instead, by going for economies of scope, it would be wiser. At the same time, if you know that as a company, your core strength lies in producing just one product, going for economies of scope to reduce the average cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more isn’t a prudent one. You need to know when and what.

Frequently Asked Questions (FAQs)

What are the different types of economies of scale?

Technical economies of scale, purchasing economies of scale, and financial economies of scale are three of such economies.

Why are economies of scale important?

Economies of scale result in increased profits and larger business scale. Economies of scale produce larger profits, boosting returns on capital and giving enterprises a platform to expand. As a company expands, it becomes more stable and less prone to external challenges, such as hostile takeover offers.

What are diseconomies of scale?

Diseconomies of scale, as used in economics, refers to the situation that arises when a corporation encounters rising marginal costs for each new unit of output. It opposes economies of scale.

Recommended Articles

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