Economies of Scope: Cost Savings through Production of Multiple Goods, Slides of Economics

Download Economies of Scope: Cost Savings through Production of Multiple Goods and more Slides Economics in PDF only on Docsity! Economies of scope Economies of scope is a term that refers to the reduction of per-unit costs through the production of a wider variety of goods or services. In economies of scope, firms try to take cost advantages by providing a variety of related products to make full use of the inputs rather than specializing in the delivery of a single product. Sharing or joint utilization of inputs among similar products are the main reason for economies of scale.  ECONOMIES OF SCOPE are present when the joint output of a single firm is greater than the output that could be achieved by 2 different firms each producing a single product  DISECONOMIES OF SCOPE are present when the joint output of a single firm is less than the output that could be achieved by 2 different firms each producing a single product  If a single firm can jointly produce goods X and Y more cheaply that any combination of firms could produce them separately, then the production of X and Y is characterized by economies of scope  This is an extension of the concept of economies of scale to the multi product case  The extent to which the economies of scope can be determined by studying a firm’s costs  If a combination of inputs used by one firm generates more output than two independent firm would produce, then it costs less for a single firm to produce both products than it would cost the independent firms.  To measure the degree to which there are economies of scope, we have to find the percentage of cost of production that is saved when two products are produced jointly rather than individually  Degree of economies of scope is the percentage of cost savings resulting when two or more products are produced jointly rather than individually Economies of scope can be measured by as follows: )()( ),()()( 21 2121 QCQC QQCQCQC SC    Where C(Q1,Q2) is the cost of jointly producing goods 1 and 2 in the respective quantities; C(Q1) is is the cost of producing 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