Page 139 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes
Example: Improved infrastructure facilities due to industrial expansion may lead to
reduction in per unit cost of production in all the firms in an industry.

8.6 Economies of Scope

According to the concept of economies of scale, cost advantages follow from the increase in
volume of production or what is called the scale of output. According to the concept of economies
of scope, such cost advantages may follow from variety of output–product diversification within
the given scale of plant. If the same plant can produce multiple products, there is the scope for a
lot of cost savings because of joint use of inputs. Broad banding policy enables manufacturers to
exploit economies of scope through product diversification.

Example: Escorts produces four wheelers from the same plant for two wheelers with
small adjustments.

Instead of increasing the scale of production of an existing product, the firm can now add new
and newer products if the size and type of plant allow this scope. In this process, the firms will
have access to scope economies in place of scale economies. In certain processes, the firm can
plan wisely to exploit both types of economies simultaneously.

8.7 Types of Revenue Curves and their Applications

We have already discussed the shapes of the revenue curves in the previous unit. Just to refresh
your memories, we will define the terms once again.
Total revenue (TR) is the total money received from the sale of any given quantity of output
during a given period of time. (TR= P × Q, where P is the Price per unit and Q is the total quantity
sold)
Average revenue (AR) is the total receipts from sales divided by the number of units sold, i.e.,
AR= TR/Q. It plays a major role in the determination of a firm’s profit. The ‘per unit profit’ of a
firm is determined as average revenue minus average (total) cost. A firm generally seeks to
produce the quantity of output that maximises profit. (We will discuss this concept in subsequent
units.)
Marginal Revenue is the revenue associated with one additional unit of production. Marginal
revenue is calculated as:

MR = TR -TR
n n n-1
Break-even Analysis

Many of the planning activities that take place within a firm are based on anticipated level of
output. The study of the interrelationship among firm’s sales, costs and operating profits at
various level of output levels is known as cost-volume profit analysis or break-even analysis.
This analysis is often used by business executive to determine the sales volume required to
break even and total profits and losses at different output levels. For illustrating the breakeven
analysis. It is assumed that the cost and revenue curves are non-linear as shown in Figure 8.6.
Total revenue is equal to the number of units of output sold multiplied by the price per unit. The
concave form of revenue curve implies that the firm can sell additional units of output only by
lowering the price. The total cost curve is based on traditional approach of relationship between
cost and output in short-run.

134 LOVELY PROFESSIONAL UNIVERSITY