The
term diseconomies of scale refer
to a situation where an increase in the size of the firm leads to a rising
average cost.
Diseconomies
of scale may be classified into internal
diseconomies and external diseconomies
of scale.
The
major internal diseconomies of scale arise from its size of the firm, technical
causes and managerial problems. When a firm achieves a size where it is
producing at the lowest possible average cost it is said to be at its optimum size.
The
optimum size will very over time
as technological progress change the technique of production.
In
addition to this, more loaded men and machinery leads to machine fault and
human failure cause breakdown of production. When the size increases
management becomes more complex and difficult. Managerial function of
co-ordination, consultation and interdepartmental decision making will get
delayed due to the size.
There
will be possibility of delay in implementation of decision within the organization.
Delay in communication will reduce the involvement of the employees.
Sorting
out and solving the problems of lack of identification and recognition which
reduce the commitment in long run.
There
are some external diseconomies of scale
in the form of disadvantages.
There is shortage of labour which causes a wage
rise.
Increase in the demand for raw materials will also bid up prices.
When there is heavy localization of industries, the land for expansion will
become increasingly scarce. Scarcity will cause an increase in the price
to purchase land or to rent.
Transport costs may also rise because of increased
congestion.
The
change in output will cause a movement along the long run average cost curve.
One of the most significant influences is external economies of scale. If
external economies are experienced, the long run average cost will shift down
(output will be now be cheaper to produce). Whereas external diseconomies
of scale are encountered the long run average cost curve will move up (output
will now be costlier to produce). Improved technology would lower the
long run average cost curve.
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