Economies of Scope: Lecture Notes

Definitions

• Economies of Scale:

  • As output increases, average cost per unit falls.
  • Volume-focused.
  • More units produced = lower average cost per unit.

• Economies of Scope:

  • Focused on variety, not volume.
  • Offering a range of products reduces average cost per unit.
  • Utilizes existing resources to distribute costs across a variety of products.

Key Concepts

• Variety vs. Specialization:

  • Instead of specializing in one product, offering various products can reduce costs.
  • Existing labor, capital, machines, infrastructure (factories, warehouses) are utilized more efficiently.

• Diversification: Related Concept

  • Diversifying products can reduce average costs.
  • Example: Amazon (Amazon Basics, Essentials, cloud computing, sponsored ads).

• Ansoff's Matrix: Connection

  • Associated with new markets and new products.
  • Diversification increases risks, but economies of scope can balance out by reducing average cost per unit.

Advantages of Economies of Scope

1. Reduction in Average Cost per Unit:
   • Leads to becoming more price competitive.
2. Leveraging Existing Brand Loyalty:
   • Examples: Amazon's diversified product range supporting brand loyalty.

Examples

• Amazon:
  • Products: Amazon Basics, Essentials.
  • Services: Cloud computing, Sponsored ads.

Conclusion

• Economies of scope help businesses reduce costs by leveraging variety.
• Diversification via economies of scope can provide competitive advantages and reduce risks.

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