ANJUMAN-I-ISLAM’S

ALLANA INSTITUTE OF MANAGEMENT STUDIES

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

 ECONOMIES OF SCALE
Economies of scale are the cost
advantages that a business can exploit by
expanding their scale of production in
the long run.
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
Forms Of Internal Economies
The principal types of internal economies are :
 Labour

 Technical

 Managerial
 Labour Economies
 At the higher level of
output, less labor (i.e.
fewer resources or
cost) per unit of Unit
labour
output is required Req.

than it required at the

smaller scale.

Scale of production
 Technical Economies
 Economies of superior technique : Use of superior
techniques and capital goods

 Economies of linked processes : Linking of processes in a

continuous sequence

 Economies of By-products : Economical use of raw

materials
 Managerial 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 an
expanding firm.
Forms Of Internal Economies .. Contd
 Marketing Economies

 Economies of vertical integration

 Financial economies

 Economies of risk spreading

(i) Diversification of output

(ii) Diversification of market

 Network Economies f scale

 External 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
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
Do economies of scale always improve
the welfare of consumers?

 Standardization of products

 Lack of market demand

 Developing monopoly power

PRINCIPLES RELATED TO ECONOMIES OF SCALE

 Principle of bulk transaction

 Principle of massed(pooled) transaction

 Principle of multiples
PRINCIPLE OF BULK TRANSACTION

 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.
 Example:
Transport container 1 Transport container 2

Volume of the container utilised Volume utilised 160m3

30m3
Total Cost : Rs.1800 per journey
Total Cost: Construction, driver, AC = Rs.11.25/m3
fuel,
maintenance, insurance, road tax =
Rs.600 per journey
AC = Rs.20/m3
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.
 Principle of multiples:
 Principles of multiples is also been referred to as
balancing of processes.

Machine A Machine B Machine C

Capacity = 30 Capacity = Capacity = 400
units per 1000 units per units per week
week week
 The 6/10 Rule

 Used to measure Economies of Scale

 If we want to double the volume of the

container…the material needed to make it
will have to be increased by 6/10…i.e 60%
 Diseconomies of Scale
 The disadvantages of large scale production that can
lead to increasing average costs

So what could cause

costs to increase?
Causes of Diseconomies of scale
Problems of management – too many managers to
control & lots of salaries to pay!
Maintaining effective communication – especially
internationally – different languages
Co-ordinating activities – often across the globe!
De-motivation and alienation of staff
Divorce of ownership and control – do staff/managers
care about the company?
 Economies of Scope

 What are economies of scope?

 Measuring economies of scope

 Real world examples

Economies of Scope
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.

This is an extension of the concept of

economies of scale to the Multi Product Case
 Expansion

Long term
growth and
development
of business
Diversification
Modernisation i)Related
ii)Unrelated
 Economies of scope can be measured by as
follows:
C (Q1 )  C (Q2 )  C (Q1 , Q2 )
SC 
C (Q1 )  C (Q2 )

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:
$12  $8  $17 $3
SC    .15
$12  $8 $20
Thus joint production of goods 1 and 2 would result in a 15
percent reduction in total costs
 Economies of scope arise
from “Complementaries” in
the production or distribution
of distinct goods or services
 Real world examples

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
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

 Proctor & Gamble
 Owns 250 different product ranges
AMUL – The Taste Of India
Economies of Scale v/s Economies of Scope

 Definition

 Benefits

 Efficiency
Thank You