Question

On page 195, our textbook illustrates the concept of "economies of scope" by arguing that restaurant owners generally find it cheaper to produce chicken and steak in the same establishment rather than in separate restaurants. In Japan, however, restaurants serving only chicken or only beef are commonplace. How can this be? What are the textbook authors failing to account for in this example? Give examples from the real word in which you believe that companies are able to take advantage of economies of scope. Can you think of examples in which companies have made bad assumptions in pursuing such economies?

Answer 1

Economies of scope is the that the unit cost of producing a good would decrease as the variety of products increases. It is more likely that the products should be different but similar in nature. It seems like the Adam Smith notion of division of labour is something saying the opposite effect. It is important to note that those variety of similar kind of goods can be produced with the same fixed cost, but in case one produce these separately then the fixed cost multiplies. It is beneficial to produce more than 2 goods within same production house and to sell these with a positive rate of profit, provided there should have been enough demand.

Thanks for the question...