Economies of Scale

1
Economies of Scale

• Describes a production process in which an
  increase in the number of units produced causes a
  decrease in the average cost of each unit.

Example Coca Cola plant produces 1,000,000
bottles per week and fixed costs (utilities,
etc.) 75,000 per week. If design capacity
allows 1,500,000 bottles per week, and increased
revenue is not offset by equal or greater fixed
costs, economies of scale are realized.
Costs
Q
Quantity
Q2
Fixed costs are shared over an increased number
of goods.
2
Economies of Scope

• Production process in which the average total
  cost of production decreases as a result of
  increasing the number of different goods
  produced.

Average Production Costs Bath Soap
Average Production Costs Detergent
Manufacturer A
Manufacturer B
Quantity Produced
Quantity Produced
Total Average Production Costs
Shared Marketing Equipment R D Raw Materials
Procter Gamble
Q - Safeguard
Q - Tide
Q - Dawn