Distinguish between Economies of Scale and Economies of Scope.
The economies of scale state that the cost advantages are based on the increase in the volume of production or scale of output. Where as, the economies of scales are based on a variety of output. The economies of scale follow the law of diminishing returns whereas the economies of scope follow the increase in volume of production, that is the scale of output. It can also be said that the economies and dis-economies of scale are related with the behavior of the average cost curve as the plant size increases. And with the increase in the scale of output a greater potential for specialization of productive factors is achieved. On the other hand, the economies of scope exist when the cost of producing products jointly is less than the cost of producing a single product.
The economies and dis-economies of scale can further be studied in the form of internal and external economies and dis-economies of scale. The adjustment in the individual firm’s output result in the changes in the long run average cost curve and internal economies of scale are achieved. The external economies of scale help in reducing the production costs. The economies of scale are measured in terms of cost-output elasticit,; Ec. Ec may be defined as the percentage change in the average cost of production resulting from a one percent increase in the output depicted as:
[img alt_text=’economies of scale’ description=”]https://cdn.owlgen.com/wp-content/uploads/2019/10/economies-of-scale-min-1.png[/img]
The MC and AC are equal when Ec is equal to one, which further means that neither economies nor dis-economies of scale occur. When MC is less than AC the economies of scale occur. The dis-economies of scale occur when MC is greater than AC and Ec is greater than one. Whereas to measure the degree to which there are economies of scope, a percentage of the cost of production is saved when two or more products are jointly produced rather then individually. The degree of economies of scope may be depicted as
Sc = C(Q1) + C(Q2) – C(Q1 + Q2) / C(Q1 + Q2)
Where C (C(Q1) is the cost of producing output Q!, C(Q2) is the cost of producing output Q2 and C (Q1, Q2) are the joint costs of producing both the outputs (Q1 + Q2). It can also be added that the economies of scope occur when the joint cost is less than the sum of the individual costs and Sc is greater than 0. The dis-economies of scope occur when Sc is negative. In simple words, the larger the value of Sc, the greater is the economies of scope.