DISCUSSION BOARD FOUR
Discussion Board Four
Liberty University
Business 620: Global Economic Prospective
June 5, 2014
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DISCUSSION BOARD FOUR2
Discussion Board Four
What is the meaning of economies of scope? How do they differ from economies of scale?
Provide examples in your discussion.
Economics is, “A social science concerned chiefly with description and analysis of the
production, distribution, and consumption of goods and services” (Economics, 2014). Various
theories have been developed to understand the concept of economics, such as economies of
score and economies of scale.
Conceptually, these two theories are similar. Economies of scope describes how, “The
average total cost of production decreases as a result of increasing the number of different goods
produced [, whereas] economics of scale is the cost advantage that arises with increased output
of a product” (Hindle, 2008). The difference between the two theories is that economies of scale
refers to product of a single product type and economies of scope refers to producing numerous
product types. For example, Banker (1990) illustrates economies of scope occurs by describing a
fast food restaurant because the company is able to product both burger and french fries at a
lower cost because both products are able to use the same food storage, preparation facilities, and
transportation services. In comparison, Banker (1990) describes economies of scale by
describing a supermarket. Supermarkets have the ability to buy products in bulk, which lowers
the average cost. For example, they can buy 10,000 cartons of milk rather than just 100 cartons
and it will be less expensive because the marginal cost of delivering 10,000 versus 100 is low.
Economies of scale occurs in more areas of a company than production and purchasing; it also
has beneficial characteristics in finance. From a finance perspective, larger companies can
borrow at lower interest rates than small companies because they have a lower cost of capital
(Hindle, 2008).
DISCUSSION BOARD FOUR3
As an employer wants to reduce the production cost during the economic recession, he/she
could choose to
1)lay off some workers without changing wages or
2)keep all workers but cut wages for all.
Which method would you choose? Why?
A recession is, “A slowdown or a massive contraction in economic activities. A
significant fall in spending generally leads to a recession, which is indicated through a fall in DP,
corporate profits, employments, etc.” (Recession, 2014). When this occurs, companies are forced
to make difficult budgeting decisions. In this case, a company must reduce production cost and
must decide between laying off workers or keeping all workers but lowering wages.
Logically speaking, the best thing to do would be to keep all workers and lower their
wages. The reasoning for this is because losing workers means the company will lose efficiency
in the production process. For example, if the company has 500 workers and manufactures at a
rate of 1,000 products a day, this number will decrease if the company decreases to 400 workers,
which at the end of the day does not lower production cost. This concept is assuming the
company is working at the most efficient rate and all employees input the same amount of effort.
However, the company still faces the problem of decreased employee morale if wages are
lowered. To fix this, the company should be open with its employees about what is happening so
they understand the reasoning. By doing this, it could possibly change employees’ attitude
because they will be grateful they were not laid off, and will encourage a teamwork environment.
In addition, other non-monetary incentives should be implemented to foster employee drive. For
example, Cascio (2009) describes how pay cuts can lower morale and lead to lower productivity
if employees do not feel valued. To increase their sense of worth, companies can implement
ALD
DISCUSSION BOARD FOUR
tactics such as offering flexible working arrangements, providing training courses, providing
tangible recognition, and offering rewards based on employees’ personal interests (p.12-14).
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References
Banker, R. (1990). Economies of scope. Telecommunications Industry." Information Economies
and Policy. Retrieved from http://www.inc.com/encyclopedia/economies-of-scope.html
Cascio, W. (2009) Employment downsizing and its alternatives. SHRM Foundation: Investing in
the Future of HR, p. 1-48. Retrieved fromhttp://www.shrm.org/about/foundation/produ
cts/documents/downsizing%20epg-%20final.pdf
Economics [Def. 1]. (2014). In Merriam Webster Online, Retrieved from http://www.merriam-
webster.com/dictionary/economics
Hindle, T. (2008). Economies of scale and scope. The Economist. Retrieved from http://www.ec
onomist.com/node/12446567
Recession. (2014) The Economic Times. Retrieved from http://economictimes indiatimes.com
/definition/recession
