economies of scope and scale.pptVIP

* * * * * * * * * The explanation that accompanies this slide is fairly straight forward – The first container has a carrying capacity of 20 cubic metres. The cost of carrying the product involves the actual construction of the container/lorry etc, the cost of the maintenance, driver etc. This is assumed to be ￡600 per journey and as such gives an average cost of ￡30 per cubic metre. Doubling the dimensions of the container increases the carrying capacity by 8 times. However, the cost of the construction, maintenance etc is not likely to rise by 8 times. The example shows cost having risen 2 times. As a result the cost per unit is now ￡11.25 per cubic metre! Again the point about the relative competitive advantage is worth highlighting. * * * * * * * * * * * * * * * ECONOMIES OF SCALE V/S ECONOMIES OF SCOPE PRESENTED BY, GAURAV H. NANJANI PGDBM. BATCH 09-11 RIZVI MANAGEMENT INSTITUTE. BANDRA (w) MUMBAI INTRODUCTION. ECONOMIES. Its all about cost effectiveness. SCALE. Its all about the benefits gained by the production of large volume of a product. SCOPE. It is linked to the benefits gained by producing a wide variety of products by efficiently utilizing to same operations. ECONOMIES OF SCALE. WHAT ARE ECONOMIES OF SCALE More units of a goods or service produced on a larger scale,with less input costs, economies of scale are said to be achieved. Alternatively, this means that as a company grows and production units increase, a company will have a better chance to decrease its costs. The term economies of scale refers to a situation where the cost of producing one unit of a good or service decreases as the volume of production increases. ECONOMIES OF SCALE Capital Land Labour Output TC AC Scale A 5 3 4 100 Scale B 10 6 8 300 Assume each unit of capital = Rs.5, Land = Rs.8 and Labour = Rs.2 Calculate TC and then AC for the two different ‘scales’ (‘sizes’) of production facility. What happens and why? AC