What are the scope economies?

The

scope economies have to do with the concept that the average total production costs are influenced by the total units of various goods produced by the company. This means that production costs will begin to decrease as the number of individuals of each goods produced. The idea is that some sources used in the overall production process are relevant to more than one product and that sharing the costs of these processes between different products will lead to lower production costs per unit.

There is some similarity between savings of scope and savings. Both include an attempt to make the most effective use of available resources as a means of producing the most products for the lowest possible unit costs. It is different that savings from the extent are usually associated with the production of a single product where the scope economies focus on the use of some of the same sources and equipment to produce a large number of two or more products.

One easy way to understand how the economies of the extent function is to consider the operation of a fast food restaurant. Since the restaurant of this type usually contains an offer that offers different selections, it is important to identify the sources that can be used to prepare all these offers as well as promoting different menu items. Using the same areas of food preparation, some of the same components and even using the same advertising strategies to promote the menu items, the company can produce each item at lower costs than to try to use separate sources to produce and promote each of these items. The final result is more efficient use of available sources, lower total production costs and higher net profit for the owner of the restaurant.

Effective tool that helps promote the efficiency of the scope economies is known as a volume or product association. Using an example of a fast food restaurant can Ptake away from promoting a specialty that includes a hamburger or sandwich associated with the drink and side of the fries, salad or other secondary item listed in the menu. The idea here is to create an offer that uses more than one product and attracts the customer to choose this offer over the order of each product. Although it can reduce the actual profit from each unit sold, it can actually increase the volume of sales. This can often allow the seller more efficient use of resources and to compensate the difference in sales prices with relative ease.