Economies of scale and economies of scope are the two very important terms and financial concepts that businesses can use to reduce their costs. These terms may sound similar to you, but there is an obvious difference between them. In this article, we will get to know the complete difference between economies of scale and economies of scope. The blog has the following main topics.
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Definition Of Economies Of Scale
When more units of goods and services are produced on a larger scale, with less input of cost, economies of scale are said to be achieved. This means that economies of scale occur when a business reaches a point of production where the cost of production reduces, instead of increasing. This strategy helps the company to increase production while lowering costs, which also allows them to avail discount offers for their customers. There are two major types of economies of scale that are as follows:
- Internal Economies Of Scale- In this type of economies of scale, a business generally increases production to a certain level in which production cost begins to decrease. Such type of economies of scale takes place within the firm.
- External Economies Of Scale- In such types of economies of scale, as a business sector and country’s economy grow, the price of production decreases, as sales rise. It takes place within the entire industry, and its advantages are experienced by all businesses rather than only one company.
Definition Of Economies Of Scope
On the other hand, economies of scope refer to the reduction of per-unit costs through the production of a larger variety of goods and services. This means that this concept occurs when a business manufactures various goods and as a result of that, the cost of production reduces respectively. Economies of scope generally focus on the usage of the firm resources in a better manner. An example of economies of scope is a restaurant that expands its menu and includes new options with resources they are already utilizing.
Difference Between Economies Of Scale And Economies Of Scope(Table)
|Basis For Difference||Economies Of Scale||Economies Of Scope|
|Definition||This concept generally suggests that when a business reaches a certain level where the production cost of goods reduces due to the bulk production||This concept of economy says that the production of various goods can lead to a reduction in cost.|
|Reduction In||The cost of one product||Cost of production of various products|
|Cost Benefits||Due to volume||Due to variety|
|Strategy||Old strategy||New one|
|Uses Of Resources||More||Less|
Key Differences Between Economies Of Scale And Economies Of Scope
Some of the major differences between economies of scale vs economies of scope are as follows.
- Economies of scale occur when a business reaches a point of production where the cost of production reduces, instead of increasing. On the other hand, economies of scope refer to the reduction of per-unit costs through the production of a larger variety of goods and services.
- In economies of scale, a business obtains or gains the cost of effectiveness due to the volume. On the other hand, economies of scope implicit proportionate savings in the cost of manufacturing products and producing multiple products.
- Economies of scale involve product normalization while economies of scope focus on product diversification, using the same scale of the plant.
- Economies of scale generally require more resources and assets while economies of scope require comparatively fewer resources as it does not rely on mass production.
- In economies of scale, a larger plant is utilized in the manufacturing of a large volume of output. As opposed to economies of scope, in which the same plant is used to manufacture different products.
So, with the above concepts and explanations, we can finally conclude that both economies of scale and economies of scope are good strategies for lowering or reducing the cost of production, but their concepts are different. The former lowers the cost by increasing the volume of output and the latter lowers the cost by increasing the number of products it offers. Both of them are two very important terms and financial concepts that businesses can use to reduce their costs of production.