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Economies of Scale and Scope

The Internet has completely reshaped the assumptions underlying economies of scale regarding the relationship between price and volume (Hindle, 2008).

Information about Economies of Scale and Scope

Adam Smith, a classical economist of the 1770s, identified division of labour and specialisation as the two key ways to achieve a larger return on production (Nooteboom, 2007). Economies of scale are known as a major factor in increasing profitability and contributing to a company’s other financial and operational rations (Cummins and Xie, 2008). The opposite phenomenon, diseconomies of scale, arises when the average production unit costs increase beyond a certain level of output (OECD, 2008). Hindle (2008) offers the following hypothetical example to illustrate economies of scale: imagine it costs US$3,000 to produce 100 copies of a magazine but only US$4,000 to produce 1,000 copies. Where resources and market demand permits, it makes more sense to pursue the latter because the average cost has reduced from US$30 to US$4 a copy. This is because the main element of cost in producing a magazine (editorial, design, labour, etcetera) are unrelated to the number of magazines produced (Hindle, 2008).

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