Economies of Scale vs. Economies of Scope: Key Differences
By Indeed Editorial Team
Updated September 13, 2022 | Published August 11, 2021
Updated September 13, 2022
Published August 11, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Companies can alter their production strategies in different ways to reduce costs. While economies of scale and economies of scope are both advantageous for a business, they differ in some key ways. If you work in business, finance or a related field, you may benefit from learning about these terms.
In this article, we define both economies of scale and economies of scope and describe the differences between these two methodologies.
In an economy of scale, a company increases its production volume to reduce per-unit costs and increase efficiency.
In an economy of scope, a company diversifies its product offerings to reduce per-unit costs and increase efficiency.
Economies of scale and economies of scope are both methods a business can apply to increase profits and improve operations.
What are economies of scale?
Economies of scale occur when a company saves money due to an increase in its level of production. When a business scales the size of its operation, it may reduce the cost per unit of producing goods.
For example, by buying materials in bulk, a firm may acquire those materials at cheaper rates than they do when buying in moderate amounts. Economies of scale can lead to lower product prices for customers.
Economics of scale can be internal or external. Internal economies of scale take place within a company. In this type of situation, a company increases its own output to a point at which its production costs start to decrease.
This can give it unique advantages over other firms. In contrast, external economies of scale take place in an entire industry. In these circumstances, as the field grows, business operational costs for all companies in that area decrease.
What are economies of scope?
Economies of scope occur when a company saves money by diversifying its products. When a business alters its operation to produce a variety of products, using the same set of resources it already has, it can lower the cost per unit of developing goods.
In these contexts, the cost of producing at least two different commodities together is less than producing both of the products separately. For example, a restaurant might add new menu items that use the same ingredients as other items.
Economies of scale vs. scope
Economies of scale and economies of scope are both useful financial concepts that companies can apply to reduce their costs. Here are some important differences between these key frameworks:
Causes of cost benefits
In economies of scale, businesses expand manufacturing and standardize their products to gain cost benefits. By investing more money upfront in production, they can save money over time by decreasing the cost per unit.
For example, a vehicle producer might expand its operations by purchasing another factory. They can then use their current resources to double their output and revenue earnings.
In contrast, economies of scope are situations in which businesses diversify their products, leading to cost reductions. Diversification can allow a business to reach new markets and lower risk.
For example, a vehicle producer might decide to improve its business by manufacturing electric cars along with gas-powered automobiles. By using current resources to develop new products, they can attract more customers and generate more revenue.
In economies of scale, as companies expand production, there is a point at which costs can no longer decrease. Companies may cease to be able to create economies of scale if their production levels become too high. This can limit the amount of money an establishment can save on augmenting operations.
A limitation of economies of scope is the fact that companies may lack enough knowledge to expand their product offerings. Additionally, a company may weaken its branding by expanding its product offering too far away from its core competencies. It's important business leaders are thoughtful and careful when conducting diversification.
There are many advantages to creating economies of scale, including:
Gaining competitive advantage: Building economies of scale can allow a business to decrease the prices of products, which can attract consumers and create a competitive advantage.
Increasing the scale of business: If a business seeks to expand its operations and customer base and become an industry leader, increasing economies of scale can be a beneficial method for doing so.
Improving products: When a business focuses on scaling a specific product, it can conduct specialization and create a high-quality product that provides more value to consumers.
Here are some benefits of constructing economies of scope:
Increasing efficiency: Using the same resources to create multiple types of products can be cost-efficient, environmentally friendly and time-saving.
Increasing product variety: Developing a diversity of products can make a brand more appealing and attractive to a wider customer base.
Improving customer satisfaction: By increasing product variety, businesses can support high levels of customer satisfaction.
Reducing business risks: When investing in an assemblage of projects with varying potentials for success, companies can manage risk responsibly and meet financial targets.
Economies of scale take much more resources than economies of scope. To scale mass production, businesses may acquire more space, property, raw materials, machines, employees or other resources.
They may be responsible for significant expenses to build initial capital. They may only see savings after a certain period of time. To create economies of scope, businesses think of original creative ways to apply the resources they already have.
They may spend some upfront costs to facilitate an efficient diversification process, but they may not expand their operations that much.
Related: 25 Essential Financial Terms To Know
Age of concept
The idea of economies of scale is fairly traditional. Companies across industries have been referencing and using this concept for a significant period. The concept of economies of scope is still a relatively new, modern idea. Many businesses are still in the beginning stages of adopting it.
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