Economies of Scope are the economies that are the most economical because they maximize the production, distribution and utilization of the resources available. The economies of scale in economies of scope can be quite large and even very large. Economies of scope are economies formed by number, not by volume. In economics, the word “economy” is normally associated with cost savings by providing more varied services and by diversifying products/services by selling more of the same product/service.
When you think about economies of scale in the economy, it means less costs are required to perform economic activity. If you purchase an item from a retailer, you are paying for a product at a factory-fixed cost. If you buy an item at a factory-fixed price, you may have to pay sales tax. If you purchase an item from a retailer, you are paying for a product at a factory-fixed rate, but you have to wait for it to make it to you, or you have to pay for the transportation and delivery costs.
Economies of Scope can occur in almost every industry and there are three primary economies: horizontal economies, vertical economies, and converging economies. The horizontal economies are the economies of scale that are created when you buy more of the same product from a single source and the vertical economies are economies of scale that occur when you buy from more than one source. Converging economies occur when all economies of scale come together. Convergence is the ability of a business to increase its economies of scale. Convergence occurs when there is a reduction in the costs of doing business.
Economies of Scope can create converging economies. This means that you can save money on goods and services if you buy all your needs from a single source and then buy all your wants from that same source. The economies of scope of an enterprise can be used to drive down the overall price of goods and services. You will save money if you buy a high volume item from a company who has economies of scope.
Economies of Scope can also cause economies of scale. If you look around, you will find that businesses are purchasing less items in order to build economies of scope. If a firm buys a small machine rather than buying a large, complex machine, then it is reducing the number of things it has to buy in order to provide a small amount of service. This is one of the economies of scope. In order to have economies of scale, you must also reduce the amount of physical labor in order to reduce overhead, which means you have to cut back on some of the products and services.
Economies of Scope can also occur when the firms purchasing the goods and services of a business are buying from suppliers who do not have economies of scope. It can occur when a business partners with a supplier who does not have economies of scope, then that firm can purchase from a different firm that has economies of scale in order to create economies of scope.
Economies of Scope can also occur when a business partners with a supplier who has economies of scope. For instance, suppose you purchase products from a manufacturer and then the manufacturer sells a lot of their products to a retail store; this can create economies of scope in the retail store and therefore saving the company money.
Economies of Scope can also occur when a firm makes a purchase from a manufacturer and uses the products in order to produce its own products. This can lead to economies of scale in the manufacturing industry since the company can produce more products and provide more services.