The scientific method is used by economists and other social scientists to derive principles of economics. It is also used by physical scientists and life scientists to derive generalizations about the natural world.
Economic generalizations are positive economic statements that describe the operation of individual economic units and specific markets. They are not normative economic statements that make predictions about the future.
Economic theory explains how people satisfy their unlimited wants by carefully using their relatively limited resources. For example, society might want an endless supply of pizza but lack the money to buy it. Economics aims to help people use their resources in the best way possible and make informed decisions about their spending habits.
Economies of scope are one way to reduce the average total cost of production by introducing multiple products with shared resource inputs. This helps companies save money and improve their profit margins.
A common way to achieve economies of scope is to produce more than one type of product in the same manufacturing building or factory. For instance, a shoe manufacturer could add a line of children’s shoes to its existing men’s and women’s sneaker lines by using the same production process, equipment, supplies, and storage facilities.
Another way to achieve economies of scope is to expand a business’s range of products with a merger or acquisition. This can reduce the costs of making different types of goods and allows a company to reach more consumers.
The main downside of economies of scope is that it dilutes a company’s core values, particularly if a business focuses on producing a certain type of product. For example, if you’re a dog-clothing company and want to sell more necklaces, you would need to increase the number of types of products you produce to meet customers’ increasing demands.
However, the benefits of economies of scope can outweigh the disadvantages. For example, if you’re an electronics manufacturer and decide to add a new line of computer monitors to your current desktop product offerings, the extra revenue generated by this addition will offset the increased cost to produce these devices.
Economies of scope can be difficult to define, especially when it appears to run counter to the idea of specialization and scale economies. To determine if a firm is achieving economies of scope, the business should subtract the costs associated with producing two different goods and divide them by the costs of joint production. The number will equal zero if the firm is not achieving economies of scope.
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