M A N A GE R IA L

E C ON O M IC S
ACC 1
A
 JAYBEL ONAISA
SHAKIR CHRISTI
LE H
A OLIS NE
MANTIC MUSTAP
01 02 MOFAR
03 04
AHON HA

REPORTERS
CHAPTER
Increasing marginal
cost
Economies of scale
Learning curves
Economies of scope
diseconomies OF
SCOPE
 • A synergy is any effect that
increases the value of a
Getting to Know
merged firm above the
combined value of the two
Synergies
separate firms.

• This is achieved when the cost

of producing the different
products offered by the
separate companies would be
less expensive than when
produced by one company, or
 (Price - Average Cost) * Quantity
= Profit
If Marginal Cost
goes down, you
get an “extra”
A reduction
increase in profit
in average from the increase
cost in output. Recall
translates to that, if Marginal
an immediate Cost falls below
Marginal
increase in KEY NOTES Revenue it
profit
becomes
INCREASING
MARGINAL COSTS
 Increasing Marginal Costs

• A developing firm will most likely or eventually

have to make economic decisions where they need
to maximize their profit by increasing their
production or producing one more extra unit.
• Marginal Cost - is the additional cost incurred by
producing and selling one more unit.
 Increasing Marginal Costs
• The law of diminishing marginal returns states
that as you try to expand output, your marginal
productivity (the extra output associated with extra
inputs) eventually declines.
• Diminishing marginal productivity implies an
increasing marginal cost
• Increasing marginal costs eventually lead to
increasing average costs.
ILLUSTRAT
ION
ILLUSTRAT
ION
ECONOMIES
ECONOMIES OF SCALE
As businesses grow and their output
increases, they commonly benefit from a
reduction in average costs of production. Total
costs will increase as output increases.
However, the cost of producing each unit falls
as output increases. This fall in average costs
as output increases indicates that a business
is benefitting from economies of scale.

SAM
CH
SAN
TE
 How Economies
of Scale Work
Economies of scale also give a
The economy of scale competitive advantage to large
depends entities over smaller ones. The
on the goods or larger the business, non-profit,
services being
sandbox or government,
produced. the lowersandbox
its per-unit costs.

Any way that a

company can improve
the per-unit cost is by
producing more units.
sandbox
 NOTE:
• If long-run average costs are
constant with respect to
output, then you have
constant returns to scale.
• If long-run average costs rise
with output, you have
decreasing returns to scale
or diseconomies of scale.
• If average costs fall with
 In smaller
businesses…
The cost per unit
depends on how much
the company produces.

For example, a clothes

store may employ a
marketing manager
working from a serviced
 • For example, job shops produce
In LARGER COMPANIES… products in groups such as shirts
It can produce more with their company logo.
by spreading the cost • Another example, a business
of production over a might enjoy an economy of scale
larger amount of concerning its bulk purchasing.
By buying a large number of
goods.
products at once, it could
negotiate a lower price per unit
NOTIFICATION

1
Economies of scale not
only benefit the
organization that
produces the goods.
Economies of scale are
important because they
can help provide
businesses with a
competitive advantage in
their industry.
 LEARNING
C U R V ES
• Cost per unit of output may decline as
the firm gains more experience in
repeatedly producing a process over
successive periods.
• Current production lowers future costs.
• Cumulative experience in the
production of a product over time
increases efficiency and improves
 EXAMPLE

EXAMPLE
 ECONOMIES OF SCOPE

ECONOMIE
S OF
Economies of Scope
SCOPE
is an economic
theory stating that
average total cost of
production
decreases when
there is an
increasing variety of
goods produced.
 ECONOMIES OF SCOPE

(Q1, Q2)
The cost of
producing two
products together
(Q1, Q2) is less
than the cost of
producing those
two products (Q1),
(Q2) separately.
ECONOMIES OF SCOPE

Cost (Q1, Q2) <

Cost(Q1) þ
Cost(Q2)
ECONOMIES OF SCOPE

This is a
major
cause for
mergers to
form.
 A merge in the food
distribution business.
Companies: Kraft, Sara Lee, and PENYEBAB
ConAgra
DAMPAK
Products: A variety of meat products, PENANGGULANGA
hot dogs, sausage, and lunch N

Economies of Scope: Distributed

these products together through a
Foods available in a
restaurant chain.
PENYEBAB
Restaurant 1: Fried Chicken and Rice.
DAMPAK
Restaurant 2: Fried Chicken and Rice, Fish Fillet
PENANGGULANGA
and Rice… N
—there are economies of scope in Restaurant
2.
 ...because it is much easier for a restaurant chain to
offer new dishes than to start a new restaurant
chain offering the same new foods. Therefore,
multiple dishes can be advertised at the same time
and the new foods can be prepared and served
using the same equipment and personnel.

WHY?
 Difference between
Economies of Scale and
Economies of Scope
ECONOMIES OF SCALE

ECONOMIES OF SCOPE
Focuses on the average
total cost of a higher
level of production of
one good.

ECONOMIES
OF SCALE
 Difference between
Economies of Scale and
Economies of Scope
ECONOMIES OF SCALE

ECONOMIES OF SCOPE
Focuses on the average
total cost of production
of a variety of goods.

ECONOMIES
OF SCOPE
Fun Fact!
• Scale means to produce the same thing in
larger and larger volumes. PENYEBAB
• Scope means adding variety to the mixDAMPAK
to get
to large volume. (Doing a lot ofPENANGGULANGA
things that
are different by sharing some aspects.) N
DISECONOMIES OF
SCOPE
• If the cost of
producing two
products together is
higher than the cost
of producing them
separately.

• Usually happens in
an expansion of a
These big orders are much
more profitable than Makes pet food on
smaller orders because all extruder lines in 23
orders require the same 06 01 plants
setup time regardless of
the amount produced and Variety of
Because big
packaged. Ani customers (large-
mal
customers order in 05 Inc
S na
x 02 scale retailers to
bulk, the .
regular pet
manufacturer can set owners) the
up its extruders for Currently, firm
produces 2,500 different
long production
Some of the .
runslarge 04 03 products, or stock-keeping
customers have units (SKUs), using 200
demanded price different formulas. All
customers pay about the
 To reduce the costs associated
with smaller orders,

SOLUTIO AnimalSnax reduced the

variety of its product offerings
to 70 SKUs, using only 13
different formulas.

N The firm also began

offering price discounts
for larger orders.

This allowed the company

to consolidate small orders
into large ones to reduce
setup costs.
 SUMMARY
• The law of diminishing marginal returns
states that as you try to expand output, your
marginal productivity (the extra output
associated with extra inputs) eventually

ADD subtitle
declines.
• Increasing marginal costs eventually cause
increasing average costs and make it more
difficult to compute break-even prices. When
negotiating contracts, it is important to know
what your costs curves look like; otherwise,
you could end up accepting contracts with
unprofitable prices.
 SUMMARY
• If average cost falls with output, then you
have increasing returns to scale. In this case
you want to focus strategy on securing sales
that enable you to realize lower costs.

ADD subtitle
Alternatively, if you offer suppliers big
orders that allow them to realize economies
of scale, try to share in their profit by
demanding lower prices.
• If your average costs are constant with
respect to output, then you have constant
returns to scale. If average costs rise with
output, you have decreasing returns to scale
 SUMMARY
• Learning curves mean that current
production lowers future costs. It’s important
to look over the life cycle of a product when
working with products characterized by

ADD subtitle
learning curves.
• If the cost of producing two outputs jointly
is less than the cost of producing them
separately—that is, Cost (Q1,Q2) < Cost
(Q1) + Cost (Q2) — then there are
economies of scope between the two
products. This can be an important source of
competitive advantage and shape acquisition