Economies of Scope: Definition & Examples

Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson we will explore economies of scope. We will then learn about how economies of scope occur and how they are beneficial for companies. The lesson will be concluded with a summary and quiz.

An Introduction to Economies of Scope

We have all visited a fast food restaurant at one time or another. Without much thought we typically order our favorite foods and go on with our day. However, have you ever wondered why a restaurant is able to provide a variety of food choices? For example you can order a sandwich and fries at one restaurant instead of having to visit one place for a sandwich and another for fries. Why do you think that is? The answer to this question has to do with economies of scope.

Economies of Scope Defined

So what exactly is meant by the term 'economies of scope'? Well, economies of scope is the theory that when a firm offers a variety of products instead of specializing in just one product, the average total cost of production is decreased. In other words, if a company makes more than one product, they can expect to see a reduction in the costs associated with production.

Let's take our example above and break it down to further explain this concept. A restaurant that provides both sandwiches and fries, can reduce their costs because they often use the same storage facility, transportation services, and many other factors associated with production. The restaurant only has to pay one storage facility charge even though there are two products there. The restaurant only has to pay one transportation service charge, even though they may be transporting two products. If two different restaurant were needed to provide the sandwiches and fries, there would then be two facility storage costs, and two transportation costs, resulting in higher production expenses.

Other Important Facts about Economies of Scope

Now let's take a minute to look at some other ways to achieve an economy of scope.

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