Its 3 am and i dont have the brain activity to understand anything anymore. Please be as patronising as possible.
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Economy of scale: once you’ve figured out *how* to make something predictably and reliably, as you make more and more, the dominating cost becomes the materials and labor (not the equipment or the engineering). So the overall cost per unit comes down as more are manufactured. Think of how much engineering goes into making a smartphone, and how much it would cost if they only made a few hundred!!
The example I love to give is disc brake pads. Cars and fancier bicycles both use them, they are similar materials and obviously cars use much beefier pads, but they are much closer in price than in size, because there are way, way more cars than bicycles with disc brakes.
An economy of scale is where, by going all-in on a single item/industry, you can be more efficient. Think about building huge factories that all make the same thing over and over again.
An economy of scope is the idea that, by diversifying your business, you can also be very efficient. For example, a gas station doesn’t only sell gas; they sell snacks, drinks, common car supplies, common medicines, and sometimes alcohol. By providing a wide variety of goods, they are attracting a wider customer base and therefore getting more business.
The word “economy” in these phrases means “savings.”
Economy of scale: it costs less to make something in bulk (and then divide it into small packages for sale) than to make many (small) quantities. A cookie-making factory will have less costs per cookie than, say, the sum of all the pastry chefs in NY working separately at their bakeries to make cookies.
Economy of scope: it costs less to make related items in a factory than to have separate factories for each item. The cookie factory could easily be expanded to also make waffles, pancakes, donuts, etc., and it would cost less than building separate factories for each of these related products.
Economy of scope is when you lower the price of production by making a lot of different things. For example using waste product from production of one product to make different product or using common infrastructure.
Economy of scale is when you lower the price of production by making more of it. There is a lot of fixed cost in making product like development and marketing,…
Economy of scale has to do with automation.
I am using “hours” as a fungible resource. A hodge-podge of money/cost/manpower that covers all of those things (this is a vast simplification).
Previously if you wanted produce something, a single person would make it. It would take them an hour to make the first one and the second one and the third one.
Then came along automated factories.
Once the factory is running the amount of manpower needed to produce the same product is 1/1000 of a hour to produce each and every unit.
The issue is takes 10,000 hours to set up the factory (you have to spend those 10,000 hours).
So if you use the factory to produce 1 unit, that unit has cost you 10,000.001 hours to produce that unit.
If you produce 10 units, it has cost you 1,000.001 hours to produce each unit.
If you produce 10,000 units it costs you 1.001 hours to produce each unit.
If you produce 100,000 units is costs you 0.101 hours to produce each unit.
This is the economy of scale. The factory costs manpower (or money) to set up and get running. To make the factory cost competitive to the guy down the street that can make one unit an hour, the factory has to produce at more than 10,000 units (which will take you 10 hours to do) in order to sell at the same price as the guy down the street. As you produce more units, the total price to produce the units continues to go down.
And once you have paid off the cost of the factory, you can lower prices even more to just cover cost of manufacture.
Good answers in here but not ELI5 answers.
Economy of Scale.
For a new product say R&D cost 500,000 dollars and setting up the tooling cost another 500,000 dollars. We’ll ignore material cost and labor for a second. But if that line only produces a single unit. That unit can be said to be worth 1 million. Produce two and it’s half that and so on.
Now on to materials/base components. To specially only order a single part to create your unit will be incredibly expensive as each supplier will have the exact same issue on their hands. Getting off the shelf will be cheaper but with the disadvantage of having no say in what they are like. Also that supplier has already gone though the process.
That’s not even mentioning training the labor, which is expensive in its own right. And once trained, well, they are already there and if their job takes a minute, you’ll pay them the same to produce a single unit as you pay them to make 60.
So eventually that million+ dollar unit will essentially be let’s say $150 worth of materials plus what ever you are spending on labor with general overhead added on.
That’s economy of scale.
Economies of scale is when the cost per unit of output goes down (gets cheaper) as a firm makes more of it.
Economies of scope is when it’s more efficient or results in a lower average cost of production to make two or more things in the same place than it would be to make them all separately.
Scale is when the company that makes your fruit snacks for recess (i know the scooby doo ones are your favorite) can make them really cheaply because they produce a lot all at once, and it’s be more expensive to make fewer at a time.
Scope is when the fruit snack company also makes those little peanut butter crackers and can do it better/cheaper in the same factory vs having one factory for each.
Now get to bed munchkin, and dont forget to bring your permission slip for the zoo trip tomorrow.
“economy” in this case means “cost savings”
Economy of scale is the idea that when you can do something in bulk, you can do it more cheaply.
Say you’re a baker. You can buy flour in bulk, ship it all over at once. Shipping once a month is cheaper than shipping once a week in small batches.
Then, you can get a massive industrial oven that lets you bake multiple loaves at once, and save money on electricity. Turning the oven on once per 20 loaves is cheaper than once per 2 loaves.
Tldr: Economy of Scale is the “get your money’s worth” principal of business.
Economy of Scope is the idea that if you can do more with your business, you can make more business.
Say you own a gas station. In theory, all you need is a small parking lot with the gas pumps installed, an attendant to keep things clean, and small building for the attendant.
But, that’s a awful waste of space. You have a whole building to work with. If you maybe sold coffee, a few snacks for people on the road, you could make a killing, and give the attendant something else to actually do.
Tldr: Economy of Scope is the “make the most out of what you have” principal of business.
Say you make plastic cups. The plastic for one cup costs $1. The machine to make the plastic cups costs $50 and the mould for the cups is another $50.
If you were to make 1 cup, that cup would’ve cost you $101 to make, because your total cost is $101 and it got you 1 cup.
Now say you make 100 cups. You would pay $100 in plastic, but the $100 for the mould and machine stays the same regardless of how many cups you make.
Now your cost per cup made is $2, because while you still pay $1 per cup, you are able to spread the $100 cost of the machine across the 100 cups.
This is economies of scale at a basic level.
Now say that you can buy another mould for your plastic cup maker so that you can also make plastic trays and this add-on is also $50.
You have now spent $150 to be able to make plastic cups and plastic trays.
If you now were to make 1 cup and 1 tray, you will have spent $2 in plastic and $150 for the machine. Your cost per unit is $76.
One of your competitors however only makes cups and another only makes trays. Because they both need to have their own $50 machines and $50, making the same number of cups and trays would be more expensive for them. It would cost them $202 to make the same number of cups and trays. The cost per unit in that case is $101.
This is economies of scope at a basic level.
This can get a lot more complicated. For example you might be able to negotiate a better plastic price as you are buying twice as much as your competitors. Your machine will also be used twice as much, so it will have to be serviced twice as often which might impact your ability to keep up production. Similarly the downtime from swapping out moulds might impact your production rate. The cool thing is that you can exactly calculate if having two machines for example would be more cost effective than having a single machine with two moulds, etc.
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