Economies of scope can result if two or more products share the same set of resources.
In mathematical terms, Economies of scope, S, measures the percentage cost saving that occurs when the goods ‘A’ and ‘B’are produced together.
S = [C (QA) + C (QB) – C (Q (A+B))] / C (Q (A+B))
In the formula, C (QA) is the cost of producing the quantity QA of good A separately, and C (QB) is the cost of producing the quantity QB of good B separately. The term C (Q (A+B)) is the cost of producing the same quantities of good A and good B together.
Thus, S is greater than zero when economies of scope exist, and the larger the positive value for S, the greater the economies of scope.
Economies of scope can also arise through marketing, such as HUL having a large number of products that can be marketed in similar ways. Thus, marketing strategies, product branding, and product design costs are spread over a large number of products. Reduced distribution costs will also contribute to economies of scope.
Another example is of General Motors which produces different car models that use the same engines and transmissions.