Economies of Scale and Economies of Scope

1977 Words Oct 30th, 2010 8 Pages
Economies of scale are reductions in average costs attributable to production volume increases. They typically are defined in relation to firms, which may seek to achieve economies of scale by becoming large or even dominant producers of a particular type of product or service. A distinction can be made between internal and external economies of scales. Internal economies of scale occur when a firm reduces costs by increasing production. External economies of scale occur when an entire industry benefits from expansion; for example, through the creation of an improved transportation system, a skilled labor force, or by sharing technology.
Economies of scope are reductions in average costs
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Executives may have to divide their attention between finance, accounting, and production functions that could be handled more proficiently by departments specializing in each of these areas in a larger firm.
According to Langlois, some economies of scale result from the specialization and division of labor. Mass production allows the use of specialized equipment and automation to perform repetitive tasks. The larger the output of a product, plant, or firm, the greater will be the opportunities for specialization of labor and capital equipment. Similarly, machinery and equipment cannot be used as efficiently when it has to be switched back and forth between tasks.
Increased specialization in the use of labor is feasible as a plant increases in size. Hiring more workers means that jobs can be divided and subdivided. Instead of performing five or six distinct operations in the productive process, each worker may now have just one task to perform. Workers can be used full-time on those particular operations at which they have special skills. In a small plant a skilled machinist may spend half his time performing unskilled tasks, resulting in higher production costs. Furthermore, the division of work operations made possible by large-scale operations gives workers the opportunity to become very proficient at the specific tasks assigned to them. Finally, greater specialization tends to eliminate the loss of time that

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