Title
Running Head: ECONOMIES OF SCOPE 1
ECONOMIES OF SCOPE 4
Economies of scope
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The most important concept that I felt was the most important in the chapter was the law of diminishing returns. The law states that when the output is increased, the extra output will eventually decrease. This means that when marginal cost is increased, there will be an increase in the average cost of the products, which will make it challenging to settle for a special price of the units produced. Thus, when one is carrying out contract negotiations, they should be cautious with knowing how the cost curve looks like because one can accept contracts that are not profitable, leading to severe losses (Pencavel, 2018).
What causes this diminishing of returns is factors such as the inability to supervise and motivate a large population of employees. Increasing outputs means employing more manpower. This might be overwhelming to an individual because he or she may fail to monitor these employees, which leads to poor production and losses. Another factor is an increase in the complexity of the extensive system. The business will be large, which translates to an increase in its complexity. If one does not obtain very qualified members of staff, the business may end up failing (Deepashree, 2007).
The economies’ scope creates a low production cost for companies, which is also beneficial to consumers. Economies of scope are experienced when the cost of jointly producing two products is significantly less than creating them separately. Sometimes, economies of scale inhibit new firms from joining the industry. This hinders perfect competition and promotes monopoly. Economies of scale have also led to the over-exploitation of resources. Economies of scale are the phenomena where an organization identifies a cost advantage to the scale of operation. The activity within the organization that I recognized as an investment in research and development. Organizations at first bear a high operating cost. Through research, the organization identifies ways through which they can effectively increase their operations. Through continued operations, the cost of operation gradually reduces. The organization then gains internal economies of scale. Research also enables organizations to identify the skilled labor they require and how they can improve their existing labor through activities such as training. Through this, the organization will also gain economies of scale, which will increase the organization (Takeshima et al., 2018).
I identified an activity outside the organization that was government investment in social infrastructures such as roads, health, and education. This will help the organization reduce its operating cost because of good road networks and because its employees can access medical care. The organization will realize external economies of scale due to the decline in their operating cost. An organization is able to exploit the economies of scale by increasing its production capacity. This is because an increase in production leads to a decline in the per-unit cost of each unit. This increases the total profit per unit (chandler et al., 2009).
References
CHANDLER,A.D., Hikino,T., & Chandler,A.D. (2009).Scale and scope: The dynamics of industrial capitalism. Harvard University Press.
Takeshima,H., Hatzenbuehler,P., & Edeh,H. (2018).Effects of agricultural mechanization on economies of scope in crop production in Nigeria. Intl Food Policy Res Inst.
Deepashree. (2007).Principles of economics (For Delhi University B.Com pass course). Tata McGraw-Hill Education.
Pencavel,J.H. (2018).Diminishing returns at work: The consequences of long working hours. Oxford University Press.
