Economies And Diseconomies Of Scale Pdf
Millicent
The Minimum Efficient Scale (MES) is the level of production at which a firm achieves the lowest possible long-run average cost per unit of output. In other words, it is the point at which economies of scale are fully realized, and any further increase in production would result in diseconomies of scale.
When a firm operates at or near its MES, it can produce goods or services at the lowest cost, making it highly competitive in the market. MES can vary from one industry to another and depends on factors such as technology, market demand, and the specific production process.
In summary, internal economies of scale are firm-specific and result from actions taken by the firm itself, while external economies of scale are industry or region-specific and result from external factors that benefit multiple firms in the same area or industry.
Notice that the long-run average cost curve in Figure 8.9 "Relationship Between Short-Run and Long-Run Average Total Costs" first slopes downward and then slopes upward. The shape of this curve tells us what is happening to average cost as the firm changes its scale of operations. A firm is said to experience economies of scale when long-run average cost declines as the firm expands its output. A firm is said to experience diseconomies of scale when long-run average cost increases as the firm expands its output. Constant returns to scale occur when long-run average cost stays the same over an output range.
Why would a firm experience economies of scale? One source of economies of scale is gains from specialization. As the scale of a firm's operation expands, it is able to use its factors in more specialized ways, increasing their productivity. Another source of economies of scale lies in the economies that can be gained from mass production methods. As the scale of a firm's operation expands, the company can begin to utilize large-scale machines and production systems that can substantially reduce cost per unit.
Why would a firm experience diseconomies of scale? At first glance, it might seem that the answer lies in the law of diminishing marginal returns, but this is not the case. The law of diminishing marginal returns, after all, tells us how output changes as a single factor is increased, with all other factors of production held constant. In contrast, diseconomies of scale describe a situation of rising average cost even when the firm is free to vary any or all of its factors as it wishes. Diseconomies of scale are generally thought to be caused by management problems. As the scale of a firm's operations expands, it becomes harder and harder for management to coordinate and guide the activities of individual units of the firm. Eventually, the diseconomies of management overwhelm any gains the firm might be achieving by operating with a larger scale of plant, and long-run average costs begin rising. Firms experience constant returns to scale at output levels where there are neither economies nor diseconomies of scale. For the range of output over which the firm experiences constant returns to scale, the long-run average cost curve is horizontal.
Diseconomies of scale occur when the cost per unit increases with an increase in the quantity produced. This means that any attempt by a firm to increase its output will transcend to a corresponding increase in the unit cost associated with the unit increase in output.
This usually happens when a firm becomes too big. It is represented on the following graph when going from Q1 to Q2. Beyond point Q1, which is the ideal firm size, producing more goods increases per-unit costs.
In microeconomics, diseconomies of scale are the cost disadvantages that economic actors accrue due to an increase in organizational size or in output, resulting in production of goods and services at increased per-unit costs. The concept of diseconomies of scale is the opposite of economies of scale. It occurs when economies of scale become dysfunctional for a firm.[1] In business, diseconomies of scale[2] are the features that lead to an increase in average costs as a business grows beyond a certain size.
Ideally, all employees of a firm would have one-on-one communication with each other so they know exactly what the other workers are doing. A firm with a single worker does not require any communication between employees. A firm with two workers requires one communication channel, directly between those two workers. A firm with three workers requires three communication channels between employees (between employees A & B, B & C, and A & C). Here is a chart of one-on-one communication channels required:
The number of one-on-one channels of communication grows more rapidly than the number of workers, thus increasing the time and costs of communication. At some point one-on-one communications between all workers becomes impractical; therefore only certain groups of employees will communicate with one another (e.g. within departments or within geographical locations). This reduces, but does not stop, the increase in unit costs; and also the organisation will incur some inefficiencies due to the reduced level of communication.
An organisation with just one person cannot have any duplication of effort between employees. If there are two employees, there could be some duplication of efforts, but this is likely to be minor, as each of the two will generally know what the other is working on. When organisations grow to thousands of workers, it is inevitable that someone, or even a team, will take on a function that is already being handled by another person or team. In colloquial terms, this is described as "one hand not knowing what the other hand is doing". General Motors, for example, developed two in-house CAD/CAM systems: CADANCE was designed by the GM Design Staff, while Fisher Graphics was created by the former Fisher Body division. These similar systems later needed to be combined into a single Corporate Graphics System, CGS, at great expense. A smaller firm would have had neither the money to allow such expensive parallel developments, nor the lack of communication and cooperation which precipitated this event. In addition to CGS, GM also used CADAM, UNIGRAPHICS, CATIA and other off-the-shelf CAD/CAM systems, thus increasing the cost of translating designs from one system to another. This endeavor eventually became so unmanageable that they acquired (and then eventually sold off) Electronic Data Systems (EDS) in an effort to control the situation. Smaller firms typically choose a single off-the-shelf CAD/CAM system, with no need to combine or translate between systems.[citation needed]
"Office politics" is management behavior which a manager knows is counter to the best interest of the company, but is in their personal best interest. For example, a manager might intentionally promote an incompetent worker, knowing that the worker will never be able to compete for the manager's job. This type of behavior only makes sense in a company with multiple levels of management. The more levels there are, the more opportunity for this behavior. In a small company, such behavior could cause the company to go bankrupt, and thus cost the manager their job, so they would not make such a decision. In a large company, one manager would not have much effect on the overall health of the company, so such "office politics" are in the interest of individual managers.
Global emergencies, such as COVID-19 in 2020, can easily disrupt supply chains. This disruption has a higher chance of affecting large organizations[citation needed] - especially when there are only a few large suppliers. Smaller organizations with robust, local supply networks can manage supply chain shocks because any localized shock has a smaller effect on the overall ecosystem.
A small firm only competes with other firms, but larger firms frequently find their own products are competing with each other. A Buick was just as likely to steal customers from another GM make, such as an Oldsmobile, as it was to steal customers from other companies. This may help to explain why Oldsmobiles were discontinued after 2004. This self-competition wastes resources that should be used to compete with other firms.
If a single person makes and sells donuts and decides to try jalapeo flavoring, they would likely know on the same day whether their decision was good or not, based on the reaction of customers. A decision-maker at a huge company that makes donuts may not know for many months if such a decision is embraced by consumers or if it is rejected, especially if their research or marketing team fails to respond in a timely manner. By that time, the decision-makers may very well have moved on to another division or company and thus see no consequence from their decision. This lack of consequences can lead to poor decisions and cause an upward-sloping average cost curve.
In a reverse example, the smaller firm will know immediately if people begin to request other products, and be able to respond the next day. A large company would need to do research, create an assembly line, determine which distribution chains to use, plan an advertising campaign, etc., before any changes could be made. By this time, the smaller competitors may well have grabbed that market niche.
This will be defined as the "we've always done it that way, so there's no need to ever change" attitude (see appeal to tradition). An old, successful company is far more likely to have this attitude than a new, struggling one. While "change for change's sake" is counter-productive, refusal to consider change, even when indicated, is likewise toxic to a company, as changes in the industry and market conditions will inevitably demand changes in the firm in order to remain successful. An example is Polaroid Corporation's delay in moving into digital imaging, which adversely affected the company, ultimately leading to bankruptcy.
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