CHAPTER • The Cost of Production 259 Number of tractors F IGURE 7.11 O2 PRODUCT TRANSFORMATION CURVE The product transformation curve describes the different combinations of two outputs that can be produced with a fixed amount of production inputs The product transformation curves O1 and O2 are bowed out (or concave) because there are economies of scope in production O1 Number of cars If curve O1 were a straight line, joint production would entail no gains (or losses) One smaller company specializing in cars and another in tractors would generate the same output as a single company producing both However, the product transformation curve is bowed outward (or concave) because joint production usually has advantages that enable a single company to produce more cars and tractors with the same resources than would two companies producing each product separately These production advantages involve the joint sharing of inputs A single management, for example, is often able to schedule and organize production and to handle accounting and financial activities more effectively than separate managements Economies and Diseconomies of Scope In general, economies of scope are present when the joint output of a single firm is greater than the output that could be achieved by two different firms each producing a single product (with equivalent production inputs allocated between them) If a firm’s joint output is less than that which could be achieved by separate firms, then its production process involves diseconomies of scope This possibility could occur if the production of one product somehow conflicted with the production of the second There is no direct relationship between economies of scale and economies of scope A two-output firm can enjoy economies of scope even if its production process involves diseconomies of scale Suppose, for example, that manufacturing flutes and piccolos jointly is cheaper than producing both separately Yet the production process involves highly skilled labor and is most effective if undertaken on a small scale Likewise, a joint-product firm can have economies of scale for each individual product yet not enjoy economies of scope Imagine, for example, a large conglomerate that owns several firms that produce efficiently on a large scale but that not take advantage of economies of scope because they are administered separately The Degree of Economies of Scope The extent to which there are economies of scope can also be determined by studying a firm’s costs If a combination of inputs used by one firm generates more output than two independent firms would produce, then it costs less • economies of scope Situation in which joint output of a single firm is greater than output that could be achieved by two different firms when each produces a single product • diseconomies of scope Situation in which joint output of a single firm is less than could be achieved by separate firms when each produces a single product