Lowering of costs that a firm often experiences when it produces two or more products together than each alone is known as ________.
Economies of Scope
Understanding Economies of Scope and Cost Reduction
The question asks about the specific type of cost reduction a firm experiences when it produces multiple different products together, as opposed to producing each product separately. This phenomenon is a key concept in the study of firm costs and production.
Analyzing the Options
Let's look at each option to understand what it means and why it fits or doesn't fit the description in the question:
- Economies of Scale: This refers to the cost advantages that a firm gains due to the size, output, or scale of operation. Specifically, economies of scale occur when the cost per unit of output decreases as the total volume of output for a single product increases. This is often due to factors like bulk purchasing, specialization of labor, or more efficient use of large-scale machinery. This option relates to producing more of one thing, not producing multiple things together efficiently.
- Economies of Scope: This concept describes the situation where producing a variety of goods or services together is more cost-effective than producing the same goods or services separately. These cost savings arise from sharing resources, technologies, marketing channels, or processes across multiple product lines. The key here is producing multiple products together using shared resources or capabilities, leading to lower overall costs.
- Economies of Specialisation: While specialisation can lead to cost reductions (e.g., through increased efficiency and skill development), it is more broadly a source of efficiency and is often a driver behind economies of scale or scope rather than a distinct category of cost reduction related specifically to producing multiple products together. Specialisation can occur in labor, machinery, or processes, but the term itself doesn't specifically define the cost saving from producing multiple goods jointly.
- Technical Efficiency: This refers to producing the maximum possible output from a given set of inputs, or using the minimum possible inputs to produce a given output, given the current state of technology. While important for cost reduction, technical efficiency is about optimizing the input-output relationship in general, not specifically about the cost savings from producing multiple different products together.
Why Economies of Scope is the Correct Answer
The question specifically mentions "Lowering of costs that a firm often experiences when it produces two or more products together than each alone". This definition perfectly matches the concept of Economies of Scope. Firms achieve economies of scope by leveraging existing resources or capabilities across different product lines. For instance, a company producing dairy milk might find it cheaper to also produce yogurt or cheese using the same milk supply chain, processing equipment, and distribution network, rather than setting up separate operations for each product.
| Concept | Focus | Description |
|---|---|---|
| Economies of Scale | Scale of single output | Cost per unit decreases as output volume of one product increases. |
| Economies of Scope | Variety of outputs | Cost of producing multiple products together is lower than producing them separately. |
| Economies of Specialisation | Focus on specific tasks/products | Efficiency gains from focusing resources on specific areas (can contribute to scale/scope). |
| Technical Efficiency | Input-output relationship | Maximizing output from given inputs or minimizing inputs for given output. |
Therefore, the cost reduction associated with producing multiple products jointly is precisely what Economies of Scope describes.
Revision Table: Key Cost Concepts
| Term | Definition in Simple Terms | Example Scenario |
|---|---|---|
| Economies of Scale | Getting cheaper to make each unit as you make more total units of one thing. | A car factory builds more cars, so the cost per car goes down due to bulk buying steel. |
| Economies of Scope | Getting cheaper to make different things together than making each one separately. | A company making bicycles starts making scooters using the same factory building and some shared machinery. |
| Technical Efficiency | Making the most out of what you have (inputs) to get the most product (output). | Using machinery in a way that minimizes waste materials and energy. |
Additional Information: Sources of Economies of Scope
Economies of Scope arise from various sources that allow firms to share resources and capabilities across different product lines. Some common sources include:
- Shared Physical Assets: Using the same factory building, machinery, or distribution network for multiple products.
- Shared Intangible Assets: Leveraging brand reputation, technological know-how, or management expertise across different products.
- Shared Inputs: Using common raw materials or components in the production of different goods.
- Joint Marketing/Distribution: Advertising multiple products in a single campaign or distributing different products through the same channels.
- By-products: Producing one product results in a by-product that can be used to create another valuable product.
These synergies lead to lower average costs when products are produced jointly compared to producing them separately, illustrating the core principle of Economies of Scope.
Important Questions from Production Function
Match List I with List II
LIST I
(Production Cost)
LIST II
(Underlying Meaning)
A.
Implicit Costs
I.
Change in the total cost per unit change in output.
B.
Marginal cost
II
Total increase in costs resulting from the implementation of a particular managerial decision.
C.
Incremental Cost
III.
Inputed value of inputs owned and used by the firm.
D.
Sunk Cost
IV.
The costs that are not affected by managerial decision.
Choose the correct answer from the options given below:
For the following two statements of Assertion (A) and Reasoning (R) suggest the correct code:
Assertion (A): Low initial price regarded as the principal means for entering into mass market for some new products.
Reasoning (R): Firms generally enter into production of new products with excess capacity of the plant initially.
Code:
Indicate the correct code from the following types of the long run average cost curves on which the minimum average cost of production in long run can be determined:
(i) Long run average cost curve under normal production function
(ii) Long run average cost curve under linearly homogeneous production function
(iii) Planning curve
(iv) Envelope curve
Choose the correct answer from the code given below :
In which one of the following concepts, a buyer is passively involved in an exchange transaction, and he accepts whatever is offered to him by a marketer?
When the sum of exponents exceeds one
(a + b > 1)
in the Cobb-Douglas production function, it causes which one of the following?
