Economies of Scope
Candlefocus EditorEconomies of scope arise when multiple products are produced in the same factory. This could be because the production processes of the different products are complementary in nature, or that the goods have complimentary capabilities. For example, a company producing a phone and a laptop in the same factory may have economies of scope because the processes to build their electronic guts are the same. Similarly, because these products are likely to be complementary goods, in that consumers often buy both products together, economies of scope could also result as they may be manufactured as bundles or together as one product.
Economies of scope also result when companies can apply the same inputs, such as labor and raw materials, to multiple goods. For example, a factory that produces juices may have economies of scope when it begins to produce smoothies as well. This would be the case if both drinks were made using the same ingredients, but in slightly different proportions. In this situation, the costs related to labor and ingredients would not need to be increased and the cost of goods sold would be relatively lower.
Economies of scope are essential for businesses looking to be competitive in cost and increase their profit margins by simplifying the production of multiple goods. They arise from goods that are co-products or complements in production and that have complimentary production processes or share inputs to production. When businesses are able to recognize and capitalize on the economies of scope offered by their production processes, they can reap financial rewards and increased market competitive advantages.