This week’s Word Up is two words actually. They have a similar concept so I thought I would present them at the same time.
Economies of Scale: The increase in efficiency of production as the number of goods being produced increases.
Beware: there are concerns of buying too much and having the supplies go to waste or spoil. Think of a small cookie store. The owner can buy her materials in bulk, thus reducing her costs in the long run. But she needs to take into consideration shelf life of the supplies as well as the amount of cookies baked compared to cookies sold.
This concept can be used for a home situation as well. Costco and Sam’s Wholesale Stores are great places to stock up on bulk items – if your family consumes them in the appropriate amount of time. If you won’t consume the items, it will probably save you money to buy in smaller quantities.
Economies of Scope: An economic theory stating that the average total cost of production decreases as a result of increasing the number of different goods produced.
Example: I always remember the example we learned in college for this concept. Think Boeing. They produce airplanes. But a similar product that would use a similar technology and production methods would be if they added producing rockets to their platform. Producing dog food would not be a good example of Economies of Scope for Boeing.
If you think in terms of a small business – whether you produce something or offer a service – let’s consider a massage therapist. She could offer to sell the oils and candles that she uses during her massage sessions to clients. Maybe even the music that she plays too. But getting into selling yoga mats and self-help books might be pushing the boundaries of Economies of Scope.
This one is a hard one to apply to a home situation – although I do like to believe most business principles can be applied to the home. I’ll keep thinking on this one.
Do you run a small business? I’d love to talk with you about how you can implement the concepts of Economies of Scale and Scope into your business. Let’s chat!
Thanks for reading! Amy