Unformatted text preview: -speciﬁc investment to
obtain a higher price. R.E. Marks ECL 2-16 2.5 Economies of Scale and Scope
(Besanko pp. 173–216) 2.5.1 Economies of Scale
A production process for a speciﬁc good or service
exhibits economies of scale over the range of output
when Average Cost declines over that range.
For AC to decline as output Q increases, the
Marginal Cost MC must be less than overall AC.
If AC is constant, then MC = AC and we say that
production exhibits constant returns to scale.
If AC is increasing, then MC > AC and we say
there are diseconomies of scale.
MC (Q ) AC (Q )
............. ... ..................
Output per period, Q R.E. Marks ECL 2-17 2.5.2 Economies of Scope
Economies of scope exist if the ﬁrm achieves
savings as it increases the variety of activities it
performs, such as the variety of goods or services it
Usually deﬁned in terms of the relative total cost
of producing a variety of goods together in one ﬁrm
versus separately in two or more ﬁrms.
The cost implications are shown in the table:
TC (Qx , Qy )
Qx is the number of adhesive message note pads
produced and Qy is the number of tape rolls
TC (Qx , Qy ) is the Total Cost to the single ﬁrm of
producing Qx pads of adhesive messages and Qy
rolls of tape. R.E. Marks ECL 2-18 Given that the ﬁrm has made the investment in
developing the know-how for making tape, much of
that knowledge can be applied to producing
related products, such as adhesive message notes.
Given the up-front investment to produce tape, the
additional investment needed to ramp up
production of message notes is less than otherwise,
and the additional costs to produce 100 million
pads, on top of 600 million rolls of tape, is only $25
million, instead of the $55 million necessary from
Exploiting economies of scope is often know as
“leveraging core competences”, “competing on
capabilities”, or “mobilising invisible assets”. R.E. Marks ECL 2-19 2.5.3 Sources of Economies of Scale and Scope
• Indivisibilities and the Spreading of Fixed Costs R.E. Marks 2.5.4 Limits to Economies of Scale
Why not a single mega-ﬁrm? Well:
• Rising Labour Costs. — At the product level (scale). — Larger ﬁrms pay more to their workers. — At the plant and multi-plant level (scope). — More likely to be unionised? — Capital-intensive v. labour-intensive
production (scale). — Lower worker turnover at larger ﬁrms. • Increased Productivity of Variable Inputs. — Increased speation.
• Inventories. — Large ﬁrms carry smaller inventories as a
percentage of sales than can small ﬁrms.
• The Cube-Square Law and the Physical Properties of Production.
• Marketing Economies. — Spreading advertising costs over larger...
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- Fall '13
- Microeconomics, Economics of production, R.E. Marks