Definition of Economies Of Scope
An economy of scope is an economic phenomenon that occurs when the cost of producing two products collectively is lower than the sum of individual production costs for each.
Formula for Economies of Scope:
Example of Economies of Scope:
McDonald's makes petty burgers and wraps. The cost of separately making 1,000 patty burgers is $0.25 each. Similarly, if 2,000 wraps are separately made, the cost is $0.15 each. If 1,000 patty burgers and 2,000 wraps are made together the total cost is $475.
To determine the economies of scope:
Determine C(Q1) = 1,000 x 0.25 = $250
Determine C(Q2) = 2,000 * 0.15 = $300
Determine C(Q1+Q2) = $475
Place the numbers into the Economies of Scope formula
Economies of scope = ($250 + $300 – $475) /$475 = 15.78%.
Therefore, the cost of producing patty burgers and wraps together is 15.78% less than the cost of producing them separately.