Investopedia/Steven Nickolas: What is the Difference Between Economies of Scope and Economies of Scale?

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What is the Difference Between Economies of Scope and Economies of Scale?

By Steven Nickolas | Updated May 17, 2017 — 8:58 AM EDT
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Economies of scope and economies of scale are two different economic concepts used to help cut a company's cost. Economies of scope focuses on the average total cost of production of a variety of goods, whereas economies of scale focuses on the cost advantage that arises when there is a higher level of production of one good.

The theory of economies of scope states that the average total cost of a company's production decreases when there is an increasing variety of goods produced. Economies of scope give a cost advantage to a company when it produces a complementary range of products while focusing on its core competencies.

For example, company ABC is the leading desktop computer producer in the industry. Company ABC wants to increase its product line and remodels its manufacturing building to produce a variety of electronic devices, such as laptops, tablets, and phones. Since the cost of operating the manufacturing building is spread out across a variety of products, the average total cost of production decreases. The costs of producing each electronic device in another building would be greater than just using a single manufacturing building to produce multiple products.

Conversely, economies of scale offer a cost advantage when there is an increased output of a good or service. Economies of scale arise due to the inverse relationship between the average cost per unit and output level. Economies of scale focus on the output level of one product, whereas economies of scope focus on the variety of products offered.

For example, suppose a shoe company only has fixed costs of $10,000 a month and only offers one design of shoes. If the shoe manufacturer only produces one shoe, the average total cost of the product is $100,000. However, if it increases it output level to 10,000 shoes per month, the average total cost of the product to $1 per unit ($10,000/10,000). Economies of scale arise for this company as it increases its production level of shoes.
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