Economics of Scope

The cost saving or efficiency gain that is achieved by manufacturing several complementary products at once as compared to manufacturing each product independently.

Economics of scope is not always possible in every production scenario. Only where the certain factors exist such that the producing certain products simultaneously is both efficient and cost effective.

It can also motivate companies to engage in merges and acquisitions (horizontal integration) as well as diversification.

Three factors that make it possible for economic of scope to exist in a production process are;

When two products can be co-produced - In this case, the production of Product B inevitably occurs during the production of the another product (lets call it Product A). Product B in this case may be an unintended by-product of the production of Product A.

Economically speaking, both products are referred to as complementary products. If Product B has a market value, then the manufacturers profit from selling it.

This way, co-products in a production line reduces waste and increases revenue.

Complementary Production Processes - this second factor refers to a situation where two products have the same production process. Unlike the first scenario, the second product here is not necessarily a by-product.

Same Inputs - the third factor for economic scope to be feasible is when two products requires the same inputs. Example raw material or same business structure.

Examples

The chaff that is leftover in the production of palm oil is a high-protein source for cattle - Co-poducts

Specific crops are more valuable to the farmer when planted together. A practice that is commonly referred to as companion planting - Complementary Production Process

A Snack café that sells baked products and Coffee - Shared Inputs

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