What is the difference between economies of scale and economies of scope? Provide an example of each that pertains to financial institutions.

What will be an ideal response?

Economies of scale are the lowering of average cost as output increases. For example, a lender can spread the cost of developing a single loan application and single lending contract over many loans. Economies of scale are the lowering of average cost as output increases. For example, as a lender learns and develops special skills in obtaining information on loan applicants the cost of processing these applications will fall. Economies of scale result from exploiting gains from specialization. Economies of scope imply, for example, that one firm producing two different products can do so at a lower total cost than two firms producing one product each. For example, a bank may find that it can issue both credit cards and installment loans at a lower total cost than one bank issuing only credit cards and another making only installment loans.