Economies of Scale and Scope, Essay Example

Discuss the sources of economies of scale in the airline industry

Economies of scale are the organization’s lifeline, especially huge multinational corporations such as the airline firms. According to Callan and Thomas (2001, p. 549), economies of scale can be described as a production property that illustrates the effects on the firm’s costs when the firm makes an increment in the input quantity by a predetermined amount. Thus, economies of scale exist in an organization when the rate at which expenses rise is comparatively lower than the output rate, and this condition is referred to as an increasing return to scale. However, when the rate at which the firm’s cost increases is higher than the percentage of the output then the case is a diminishing or decreasing return to scale. On the other hand, when the rate of changes in both output and cost are at the same level, then the flow is called a constant return. In the airline industry, companies rely on various sources to gain economies such as personnel specialization, image-building, marketing, and expansion into foreign markets or states through franchises (Johnston & Ozment 2013, p.107). Franchising enables airline organizations to establish the size essential for the creation of economies of scale and franchise outlets helps firms to lessen their unit costs.

Define economies of scope and give an example

Economies of scope is an economic term used to describe to the real change registered in the scope of distributing and marketing associated with a particular service or product. Callan and Thomas (2001, p.548) outline economies of scope ensure that an airline firm markets and distributes its services, as well as products in an effective way that generates increasing revenues while guaranteeing reduction of costs. Economies of scope also ensure concurrent production of different goods more cost-effective than it would have been the case of two different firms engaging in manufacturing of those products. Therefore, they define the long-run marginal and average cost of an airline industry as a result of providing similar complementary services or products. Economies of scope are vital for a huge enterprise such as an airline company because they aid in the achievement of company’s scope in various ways. Examples include product branding, advertising, and provision of frequent flyer programs to enhance the loyalty of clients.