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PROJECT: Economies Of Scale and Economies Of Scope

SUBJECT: Managerial Economics

GROUP MEMBERS: Madhura Donde (10)

Nadeem Ahmad Khan (19)

Faisal Memon (29)

Nuzhat Memon (30)

Farhan Roshan (39)Shazia Shaikh (49)

Anju Yadav (60)

PROFESSOR: Mr. M.P. REGE

ANJUMAN-I-ISLAMSALLANA INSTITUTE OF MANAGEMENT STUDIES


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ECONOMIES OF SCALEECONOMIES OF SCALE

Economies of scale are the cost

advantages that a business can exploitby expanding their scale of production in

the long run.


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Marshall classified the economies of

large scale production into two types:

Marshall classified the economies of

large scale production into two types:

Internal Economies

External Economies

INTERNAL ECONOMIES

Internal economies are open to an

individual firm when its size expands

Internal economies are the function of the

size of a firm


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Forms Of Internal EconomiesForms Of Internal EconomiesThe principal types of internal economies are :

Labour

Technical

Managerial


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Labour EconomiesLabour Economies

At the higher level of

output, less labor (i.e.

fewer resources orcost) per unit of

output is required

than it required at the

smaller scale.

Scale of production

Unit

labour

Req.


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Technical EconomiesTechnical Economies

Economies of superior technique : Use of superiortechniques and capital goods

Economies of linked processes : Linking of processes in acontinuous sequence

Economies of By-products : Economical use of rawmaterials


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Managerial EconomiesManagerial Economies When the size of the firm increases, the

efficiency of management usually

increases.

With the increasing scale of output, grater

managerial economies are enjoyed by anexpanding firm.


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Marketing Economies

Economies of vertical integration

Financial economies

Economies of risk spreading

(i) Diversification of output

(ii) Diversification of market

Network Economies f scale

Forms Of Internal Economies .. Contd


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External Economies of ScaleExternal Economies of Scale

The lowering of a firm's costs due to external

factors.

Outside the control of a firm

External economies of scale exist when the long-term expansion of an industry leads to the

development of ancillary services which benefit

all or the majority of suppliers in the industry

External economies partially explain the tendency

for firms to cluster geographically

Good Examples to quote


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External economies of scale occur when a firm benefits

from lower unit costs as a result of the whole

industry growing in size.

External economies of scale occur when a firm benefits

from lower unit costs as a result of the whole

industry growing in size.

The main types are:

Transport and communication links improve

Training and education becomes more

focused on the industry

Other industries grow to support this industry


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Do economies of scale always improve

the welfare of consumers?

Do economies of scale always improve

the welfare of consumers?

Standardization of products

Lack of market demand

Developing monopoly power


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PRINCIPLES RELATED TO ECONOMIES OF SCALEPRINCIPLES RELATED TO ECONOMIES OF SCALE

Principle of bulk transaction

Principle of massed(pooled) transaction

P

rinciple of multiples


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PRINCIPLE OF BULKTRANSACTIONPRINCIPLE OF BULKTRANSACTION

Implication:Cost of dealing with a large batch is not greater Cost dealing with

a small batch

Cost per unit becomes lesser with large

quantities.


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Transport container 1 Transport container 2

Example:

Volume of the container utilised

30m3

Total Cost: Construction, driver,

fuel,maintenance, insurance, road tax =

Rs.600 per journey

AC = Rs.20/m3

Volume utilised 160m3

Total Cost : Rs.1800 per journey

AC = Rs.11.25/m3


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Principle of massed reserve:Principle of massed reserve: The larger the firm the greater the

advantage.

Large firm has more departments hence

overall demands for services will also be

large.

Example: Transport services in a large firm.


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Principle of multiples:Principle of multiples: Principles of multiples is also been referred to as

balancing of processes.

Machine A Machine B Machine C

Capacity = 30units perweek

Capacity =

1000 units perweek

Capacity = 400

units per week


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The 6/10 RuleThe 6/10 Rule

Used to measure Economies of Scale

If we want to double the volume of the

containerthe material needed to make it

will have to be increased by 6/10i.e 60%


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Diseconomies of ScaleDiseconomies of Scale The disadvantages of large scale production that can

lead to increasing average costs

So what could cause

costs to increase?


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Causes of Diseconomies of scaleCauses of Diseconomies of scaleProblems of management too many managers to

control & lots of salaries to pay!

Maintaining effective communication especiallyinternationally different languages

Co-ordinating activities often across the globe!

De-motivation and alienation of staff

Divorce of ownership and control do staff/managerscare about the company?


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Economies of ScopeEconomies of Scope

What are economies of scope?

Measuring economies of scope

Real world examples


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Economies of ScopeEconomies of Scope

This is an extension of the concept ofeconomies of scale to the Multi Product Case

If a single firm can jointly produce goods X and Y more

economically than any combination of firms could

produce them separately, then the production of X and Y is

characterized by Economies Of Scope.


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Modernisation

Diversification

i)R

elatedii)Unrelated

Expansion

Long termgrowth and

development

of business


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)()(

),()()(

21

2121

QCQC

QQCQCQCSC

!

Economies of scope can be measured by as

follows:

Where C(Q1,Q2) is the cost of jointly producing goods 1

and 2 in the respective quantities; C(Q1) is is the cost ofproducing good 1 alone, and similarly for C(Q2).

Example: Let C(Q1) = $12 million; C(Q2) = $8 million; and

C(Q1,Q2) = $17 million. Thus:

15.20$

3$

8$12$

17$8$12$!!

!SC

Thus joint production of goods 1 and 2 would result in a 15

percent reduction in total costs


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Economies of scope arise

from Complementaries inthe production or distribution

of distinct goods or services


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Economies of scope between cable TV and high speed internet service.

Production of timber and particle board.

Corn and ethanol production.

Production of beef and hides.

Power generation and distribution

Real world examples


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Joint cargo and passenger transportation in airlines reduce excess capacity.

Global wholesale distribution of cheese, salad dressing, and

cigarettes (example: Phillip-Morris-Kraft).

Hotel Shalimar with various food items from same Kitchen.

Proctor and Gamble (P&G) with products from razors to toothpaste

Real world examples


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Owns 250 different product ranges

Proctor & Gamble


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AMUL The Taste OfIndia


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Economies of Scale v/s Economies of ScopeEconomies of Scale v/s Economies of Scope

Definition

Benefits

Efficiency


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Thank YouThank You

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