Economies of Scope refer to the cost advantages that a business experiences when it produces multiple products rather than specializing in just one. This concept highlights the efficiency gained by diversifying production, as the same resources can be utilized for different outputs, leading to reduced average costs. For instance, a company that produces both bread and pastries can share ingredients, labor, and equipment, which lowers the overall cost per unit compared to producing each product independently.
Mathematically, if denotes the cost of producing quantities and of two different products, then economies of scope exist if:
This inequality shows that the combined cost of producing both products is less than the sum of producing each product separately. Ultimately, economies of scope encourage firms to expand their product lines, leveraging shared resources to enhance profitability.
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