1. The horizontal boundaries of a firmBy
A.V. Vedpuriswar

2. The horizontal boundaries of the firm
- Optimal horizontal boundaries depend on economies of scale and scope
- Economies of scale result from doing more of the same thing
- Economies of scope result from doing more related things

3. Economies of Scale - Increased productivity of variable inputs
- Indivisibilities and the spreading of fixed costs
- Increased productivity of variable inputs
- Inventories do not increase proportionately
- Cube-square rule

4. Indivisibility
Indivisibility means that an input cannot be scaled down below a certain minimum size, even when the level of output is very small.
With a larger scale, costs can be spread over a larger output.

5. Product level indivisibility
- Special equipment such as tools and dies
- Research & development expenses
- Training expenses
- Set up costs
- When fixed capital costs are a significant percentage of total costs, production is capital intensive
- When production is capital intensive, the average total cost of production contains a substantial fixed component
- Substantial product specific economies of scale are likely when production is capital intensive
- Minimal product specific economies of scale are likely when production is labour/raw materials intensive.

6. Division of labour and specialisation
- An individual must make up-front investments of time and/or money to develop special skills.
- These investments cannot be recovered unless the demand is high.
- Increasing demand tends to be accompanied by increasing specialization.
- Larger markets are more likely to support a specialised array of activities than smaller markets.
Inventories
- Firms carry inventory to minimise risk, i.e., the chances of stock out/lost sales.
- Inventory costs drive up the cost of production.
- Firms doing a higher volume of business can usually maintain a lower level of inventory to sales while achieving a similar level of stockouts.

7. The cube square rule
- When the volume goes up by a certain proportion, the area goes up less than proportionately.
- Production capacity is typically proportional to volume
Capital /operating/ maintenance costs are typically proportional to area
In the case of oil pipelines, the pumping costs are proportional to the pipe area where as the amount carried is proportional to the volume of the pipe.
Another good example is warehousing costs.

8. - Less costly for sellers to deal with large buyers
Purchasing economies
- Volume discounts
- Less costly for sellers to deal with large buyers
- Sellers feel more comfortable getting an assured chunk of the business
Advertising economies
- Larger firms may enjoy lower advertising costs per consumer either because they have lower costs of sending messages per potential customer or because they have higher advertising reach.
- There are fixed costs associated with preparing for the ad negotiation with the broadcaster.
- Effectiveness of advertising may also increase, if the firm has broader product line/more outlets.
R&D economies
- Substantial R&D investments may be involved.
- Scale and scope allow R&D costs to be recouped more effectively.

9. Diseconomies of scale
- Rising labour costs
- Difficulties in coordination
- Difficulties in monitoring → more bureaucracy
- Difficulties in motivation
- Specialized resources spread too thin.

10. Learning curve .
-Learning curve refers to advantages that flow from accumulating experience and know-how.
-More learning can lead to lower costs, high quality and better marketing.
-Firms that pursue a learning curve strategy may earn negative accounting profits in the short run even as they prosper in the long run.
-Learning economies can be substantial even when scale economies are minimal.

11. Economies of scope
Wider product range
Distribution
R&D
Manufacturing

12. Load factor – ratio of passengers to seats available
The airline industry
Each route is like a product
Economies of density - scale along a given route reduces costs per passenger mile
Load factor – ratio of passengers to seats available
Load factor increases in a hub and spokes system

13. Microsoft Office Commonalities Scope for integration
Work, Excel, Power Point
Commonalities
Scope for integration

14. Google
Text Search
Pictures
Videos
Mail
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