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Erica Novianti Lukas

This document discusses horizontal boundaries of firms and economies of scale and scope. It defines horizontal boundaries as how much of the product market a firm serves and what variety of related products it offers. It then discusses economies of scale, where average costs decrease with increasing output, and economies of scope, where it is cheaper to produce multiple related products. Finally, it lists some reasons why firms may achieve economies of scale and scope, such as spreading fixed costs over more units of output, division of labor, and savings from bulk purchasing.

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Rimeh Bakir
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30 views

Erica Novianti Lukas

This document discusses horizontal boundaries of firms and economies of scale and scope. It defines horizontal boundaries as how much of the product market a firm serves and what variety of related products it offers. It then discusses economies of scale, where average costs decrease with increasing output, and economies of scope, where it is cheaper to produce multiple related products. Finally, it lists some reasons why firms may achieve economies of scale and scope, such as spreading fixed costs over more units of output, division of labor, and savings from bulk purchasing.

Uploaded by

Rimeh Bakir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Erica Novianti Lukas

erica.lukas@pmbs.ac.id
Horizontal Boundaries of the firm
Define how much of the total product market the firm serves (scale) and what variety
of related products the firm offers (scope).

Economies of
Economies of Scale
Scope

Firm’s Strategy
small is beautiful BIG IS POWERFUL
Economies of scale: when average cost ↓ as output ↑ (marginal cost < average cost)
Diseconomies of scale: when average cost ↑ as output ↑ (marginal cost > average cost)

U-Shaped Cost Curve L-Shaped Cost Curve


Economies of scope: exists if firm achieves savings as it increases the variety of
goods and services it produces.

It is cheaper for one firm to produce both X and Y than for two different firms to
specialize in X and Y each

TC(QX, QY) < TC(QX, 0) + TC(0, QY)


1. Spreading of fixed costs
• Indivisibilities: Certain inputs can not be scaled down below a minimum
• Product Specific fixed cost: R&D, specialized equipment, set-up cost, training
expense

Trade-offs among Alternative Technologies

Capital intensive vs Labor intensive Short run vs long run


2. Division of Labor
• Increased productivity of variable inputs due to specialization
• As markets increase in size, economies of scale enables specialization
3. Economics of Density
• Cost savings that arise within a transportation network due to a greater
geographic density of customers
• Hub-and-spoke networks
•
4. Savings on Purchasing, Advertising, R&D, Inventories
•
5. Cube-square rule
• Applies whenever output is proportional to the volume of the production of the
vessel but costs are proportional to the surface area of the vessel
•
1. Labor Cost and Firm Size
• Large firms generally pay higher wages and provide greater benefits because of
unionization & compensating differentials
• Coordination and monitoring costs
2. Spreading resources too thin
• Firms often rely on few key inputs whose cannot be easily “replicated”
3. Bureaucracy
Learning curve (experience curve) refers to advantages that flow from accumulating
experience and know-how.

The Slope as a Measure


of Learning Benefits
Learning curve reduces unit cost through experience

Complex labor intensive processes may Capital intensive technologies can


offer learning economies without scale offer scale economies even
economies without learning economies
Diversification is costly, especially when one firm acquires another.

So why diversify?

• Economies of scope Efficiency based

• Internal capital market


• Identifying undervalued firms Shareholder’s
• Diversifying portfolio (Reducing the firm’s risk and perspective
smoothes the earnings stream)

• Managers may prefer growth even if it’s unprofitable Management’s


• Managers may be able to enhance their compensation perspective
• Product life cycle model combined with an internal capital market, with the firm
serving as a banker.
• Use the cash generated by “cash cows” to exploit the learning economies of “rising
stars” and “problem children”

BCG’s Growth

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