Economies of Scope and the Learning Curve

Outline 1. What are economies of scope? 2. Measuring economies of scope 3. Real world examples 4. The learning curve 5. Source of learning

6. The shut down rule

Economies of Scope
If a single firm can jointly produce goods X and Y more cheaply that any combination of firms could produce them separately, then the production of X and Y is characterized by economies of scope This is an extension of the concept of economies of scale to the multi product case

Real world examples

Economies of scope between cable TV and high speed internet service.

Production of timber and particle board.

Corn and ethanol production Production of beef and hides.

Power generation and distribution

Joint cargo and passenger transportation in airlines reduces excess capacity.

The Learning Curve

The learning curve embodies the (inverse) relationship between average production cost and cumulative output.

Average Cost

Learning curve
Cumulative Output

Average cost is a decreasing function of cumulative output

Average Cost LAC (year 1)

Learning is manifested by a downward shift of the LAC function

Increasing returns Learning

LAC (year 2) 1,000 1,500 Rate of Output (per Month)

Moral of the story: So long as price (average revenue) exceeds average variable cost, the loss minimizing strategy will entail producing some output.