Achievements of Print, Master Printers and Their Influence on Fine Art Print
3.3 Technological developments relevant to this research
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UNIT 3 ECONOMIES OF SIZE IN AGRIBUSINESS
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production facility. If the farm is required to monitor the groundwater around the facility for contamination, they must put in a well and monitoring equipment, which represent fixed costs and can serve a large number of pigs. As the number of pigs sold increases, the costs for this aspect of production would decrease. And, as a result, monitoring in this fashion would actually provide a cost advantage to a larger operation.
There are two related concepts, which must not be confused with economies size. These concepts are economies of scale and economies of scope.
3.2 Economies of Size versus Economies Scale
Economies of scale, which measure what happens if all inputs are increased by the same proportion. If costs per unit go up, then there are diseconomies of scale. If costs per unit go down, there are increasing economies of scale, and if the costs per unit remain the same, there are constant returns to scale. According to Kay (1981) fixed costs such as management, supervision, information and machinery can be spread over more units of output (resulting in reductions in cost per unit of output (increasing returns to scale or size). Returns to scale are defined as the proportionate change in output when all inputs are increased in the same proportion.
Economies of scale may be defined in terms of elasticity of cost with respect to output. However, in a multi-product setting, an economy of scale is defined as those reductions in average cost when all outputs are increased proportionally holding all other input prices constant.
Mathematically an economy of scale is equivalent to the inverse of the sum of all the elasticities of total production cost with respect to all output. Economies of scale prevail, if the sum of elasticity of production is greater than 1 and, accordingly diseconomies of scale exist if the sum of elasticity of production is below 1. In the case of the sum of elasticity of production = 1 no economies of scale or diseconomies of scale exist.
(See further details on economies of scale in unit 1).
3.3 Economies of Size versus Economies of Scope
Economies of scope refer to reducing costs for using resources by spreading the resources over more than one enterprise. The economy of scope concept is defined as the process of reducing the cost of resources and skills for an individual business enterprise by spreading the use of these resources and skills over two or more enterprises. As shown in Figure 1, the cost for an enterprise is cut in half if the resources are used in two enterprises rather than just one. If the use of the resources is spread over three enterprises, the cost per enterprise is reduced to third.
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Figure 1: Economies of Scope
Both horizontal integration (HI) and vertical integration enable farms and business owners to enjoy economies of scope. For instance a combination of fishery and poultry is an example of horizontally integrated enterprise. If the cost of producing both poultry and fish in an horizontally integrated farm is greater than the cost of producing them separately, the farm is described as having economies of scope. If otherwise, the farm has diseconomies of scope. The economies of scope could have arisen from because the same set of workers in the poultry farms are used for feeding and draining of fish ponds and for other activities in fishery enterprise. In the same vein, the same source of water (well) will serve the same enterprises. With respect to crop production, the cost of a combine harvester can be spread over several crop enterprises because, in many cases, the only thing needed to harvest another crop is a different combine head. Another combine does not need to be purchased for each additional crop enterprise. The same combine can be used to harvest corn, soyabeans, wheat, barleyetc.
As a farmer, agronomic skills can be used in the production of two or more crops. Being a seed dealer and a farmer means that the knowledge gained about seed selection can be used both as a salesperson and a farmer. The same can be said about farmers who sell crop insurance.
Economies of scope are different from economies of size. Economies of size involve spreading fixed cost over a large number of units of production of the same product or enterprise. Economies of scope involve spreading the cost of a set of resources or skills over two or
more products or enterprises.
However, economies of size and scope are not mutually exclusive.
While economies of scope allow costs to be spread over several
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enterprises, the size of each enterprise can be increased to also achieve economies of size.
According to Kay (1981) fixed costs such as management, supervision, information and machinery can be spread over more units of output (resulting in reductions in cost per unit of output (increasing returns to scale or size). Returns to scale are defined as the proportionate change in output when all inputs are increased in the same proportion.
4.0 CONCLUSION
In this unit, you have learnt about the economies of size and related concepts namely economies of scale and economies of scope.
5.0 SUMMARY
The term ‗economies of size‘ is used to describe the fall in total cost per unit of production found on larger farms. The economies size can occur because the farmer is able to spread more production over the same level of fixed expenses. Economies of size are different from economies of scope and economies of scale. While economies of size involve spreading fixed cost over a large number of units of production of the same product or enterprise economies of scope involve spreading the cost of a set of resources or skills over two or more products or enterprises and economies of scale measure what happens if all inputs
are increased by the same proportion.
6.0 TUTOR -MARKED ASSIGNMENT
1. Define economies of size.2. Differentiate between economies of size and economies of scale.
3. Explain concisely the concept of economies of scope. State how an agribusiness firm can enjoy economies of scope.
7.0 REFERENCES/ FURTHER READING
Ahuja, H .L. (2012). Principles of Microeconomics ISBN 81-219-0335-1 S. New Delhi, India: Chand and Company Limited.
David Colander, H.O. (2008). Economics 7/e ISBN 0073402869 London: McGraw-Hill.
Hill Berkely (1990). An Introduction to Economics for Students of Agriculture 2/e ISBN 0-08-037497-2 , England: Pergamon Press Plc Headington Hill Hall Oxford, OX3OBW.