Homework assignment, question 1 Economies of Scale means that when the production of a product increases, the fixed costs are divided by the th number of units produced, therefore the average unit price decreases (Ross; Corporate Finance, 6 ed, p 825). Moreover, by producing large quantities a firm will also buy supplies in large bulks, and will obtain discounts for that reason. In other words, more a firm produces, less the cost for the single units is, allowing a higher profit, or a lower price for the final consumers. My company SAP achieves economies of scale in terms of dividing the fixed costs for a large amount of products sold, but SAP does not actually achieve it in terms of buying bulks of supplies, since it is a software company that does not manufacture physical products. The most important supplies for the creation of the software are the skills and knowledge of the software engineers. The concept of Economies of Scope is described by Mishkin with the fact that business people describe economies of scope by saying that there are “synergies” between different lines of business, and information technology is making these synergies more likely (Mishkin; The economics of money, banking, and financial markets, 2004, p 248). SAP does achieve economies of scope because the software skills of the engineers can be applied to different products. In fact, SAP can transfer engineers to the development of different software solutions, because their skills are applicable to the whole range of SAP products’ software. Unlike a manufacturing company (that for making a new product has to buy a new plant, new machineries and new supplies), when SAP decide to develop an additional type of software, they take internal people with the desired skills and create a new unit. By doing so, they leverage the synergies between their
