Diseconomies Of Scale

In time the expansion of a firm may lead to diseconomies and, therefore, higher average total costs.

The main factor causing diseconomies of scale is the difficulty of efficiently controlling and coordinating a firm's operations as it becomes a large-scale producer. In a small plant a single key executive may make all the basic decisions for the plant's operation. Because of the firm's small size, the executive is close to the production line, understands the firm's operations, and can digest information and make efficient decisions.

This neat picture changes as a firm grows. Many management levels now come between the executive suite and the assembly line; top management is far removed from the actual production operations of the plant. One person cannot assemble, digest, and understand all the information essential to decision making on a large scale. Authority must be delegated to many vice-presidents, second vice-presidents, and so forth. This expansion of the management hierarchy leads to problems of communication and cooperation, bureaucratic red tape, and the possibility that decisions will not be coordinated. Similarly, decision making may be slowed down to the point that decisions fail to reflect changes in consumer tastes or technology quickly enough. The result is impaired efficiency and rising average total costs.

Also, in massive production facilities workers may feel alienated from their employers and care little about working efficiently. Opportunities to shirk responsibilities, by avoiding work in favour of on-the-job leisure, may be greater in large plants than in small ones. Countering worker alienation and shirking may require additional worker supervision, which increases costs.

Where diseconomies of scale are operative, an increase in all inputs of, say, 10 percent will cause a less-than-proportionate increase in output of, say, 5 percent. As a consequence, ATC will increase. The rising portion of the long-run cost curves in Figure 8-9 illustrates diseconomies of scale.

Was this article helpful?

0 0

Post a comment