Question

-Describe the term economies of scale. Give a real-life example of a business where you can see an application of this term

-Describe the term economies of scope. Give a real-life example of a business where you can see an application of this term

Answer 1

Answer: -

(A). Economic of scale implies that more of output can be produced at less input costs. As industry size and production unit rises, companys cost decreases. That is, long run average costs falls with increasing output

Example Boeing and Airbus are firms producing airplanes. Economic of scale are present. Hence smaller firms found it difficult to enter.

(B). Economies of scope states that as a firm produces more number of different goods, its total average cost of production goes down. That is, as a firm expands the product scope of its business, its total average cost falls.

An example is P&G which produces both shampoo and body wash. Total average cost of P&G's producing both body wash and shampoo is lower compared to a situation when two individual firms produce one product each.