Diseconomies of scale could stem from inefficient managerial or labor policies, over-hiring or declining transportation networks. Furthermore, as a company's scope increases, it may have to market its goods and services in progressively more disperse areas. This can actually increase average costs resulting in diseconomies of scale.
Some efficiencies and inefficiencies are more location specific while others remain unaffected by area. If a company has many plants in the country, they can all take advantage of costly inputs. However, efficiencies and inefficiencies can alternatively stem from a particular location. When economies of scale or diseconomies of scale are location specific, trade is used to gain efficiencies. Diseconomies of scale are disadvantages that arise due to the expansion of production scale and lead to a rise in the cost of production. Like economies, diseconomies of scale also may be internal and external.
(a) Internal Diseconomies: Internal diseconomies arise within the firm and external diseconomies arise outside the firms, mainly in the input markets. Economies of scale have their limit. A point is reached when the advantages of specialization of labour and managerial staff, have been fully utilized. A limit is arrived when excess capacity of the plant, warehouses, transport and communication systems, etc is fully used; and advertising cost tapers off. Diseconomies being to overweigh the economies and the costs begin to rise. The internal diseconomies of scale arise mainly because of managerial inefficiency.
Managerial inefficiency: With the fast expansion of the scale of production, managerial inefficiencies arise. Personal contacts and communication between owner and managers and managers and labour get rapidly reduced. Remote control management takes the place of close control and supervision. The increase in the layers of management causes complexity and delay in decision-making. Implementation decisions are delayed due to coordination problems. The owner’s objective function of profit maximization gradually gets reduced and is replaced by manager’s utility function, like high salary, reasonable profit target, satisfying function and job security. All these lead to laxity in management and, hence to a rise in diseconomies.
Labor inefficiency
A rise in the number of workers hired encourages to labor union activities, reduction in output per unit of time, and thus leads to loss of control over labor productivity.
2. External Diseconomies: The disadvantages that arise outside the firm are known as external diseconomies. They arise in the input markets and because of natural constraints, particularly in agriculture and extractive industries. With the expansion of the firm, particularly when most of the firms in the industry are expanding, the concessions and discounts available on bulk purchases of inputs and concession finance come to an end. Increasing demand for inputs puts pressure on the input markets and their prices being to rise leading a rise in the cost of production.
Some efficiencies and inefficiencies are more location specific while others remain unaffected by area. If a company has many plants in the country, they can all take advantage of costly inputs. However, efficiencies and inefficiencies can alternatively stem from a particular location. When economies of scale or diseconomies of scale are location specific, trade is used to gain efficiencies. Diseconomies of scale are disadvantages that arise due to the expansion of production scale and lead to a rise in the cost of production. Like economies, diseconomies of scale also may be internal and external.
(a) Internal Diseconomies: Internal diseconomies arise within the firm and external diseconomies arise outside the firms, mainly in the input markets. Economies of scale have their limit. A point is reached when the advantages of specialization of labour and managerial staff, have been fully utilized. A limit is arrived when excess capacity of the plant, warehouses, transport and communication systems, etc is fully used; and advertising cost tapers off. Diseconomies being to overweigh the economies and the costs begin to rise. The internal diseconomies of scale arise mainly because of managerial inefficiency.
Managerial inefficiency: With the fast expansion of the scale of production, managerial inefficiencies arise. Personal contacts and communication between owner and managers and managers and labour get rapidly reduced. Remote control management takes the place of close control and supervision. The increase in the layers of management causes complexity and delay in decision-making. Implementation decisions are delayed due to coordination problems. The owner’s objective function of profit maximization gradually gets reduced and is replaced by manager’s utility function, like high salary, reasonable profit target, satisfying function and job security. All these lead to laxity in management and, hence to a rise in diseconomies.
Labor inefficiency
A rise in the number of workers hired encourages to labor union activities, reduction in output per unit of time, and thus leads to loss of control over labor productivity.
2. External Diseconomies: The disadvantages that arise outside the firm are known as external diseconomies. They arise in the input markets and because of natural constraints, particularly in agriculture and extractive industries. With the expansion of the firm, particularly when most of the firms in the industry are expanding, the concessions and discounts available on bulk purchases of inputs and concession finance come to an end. Increasing demand for inputs puts pressure on the input markets and their prices being to rise leading a rise in the cost of production.
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