Reference no: EM131207631

Discuss the differences between economies of scale and economies of scope.

Economies of scale is the advantage that large FIs over smaller FIs in regards to units or costs of producing FI services falls the larger the FI. This causes noninterest expense per dollar of assets to fall while the return on assets increases. Larger FIs invest in technology that lowers the FIs average costs of financial services production, thus improving the larger FIs economy of scale. As larger FIs utilize more efficient and independent technology, this drives out smaller FIs. Economies of scope is the joint use of inputs in producing multiple products. This allows cost saving techniques through synergizing the input resources thus producing financial services at a lower cost than producing independently. Economies of scope differs as it uses joint input of resources to output multiple products or services. Economies of scale is more apparent for larger banks up to the $10 billion to $25 billion size range.