Diseconomies of Scale

Diseconomies of scale A more precise definition is that long run average costs per unit rises with an increase in output. This can b shown in the diagram below: [pic] The rising part of the Long Run Average curve illustrates the effect of diseconomies of scale. Beyond Q1 (ideal firm size), additional production will increase per unit costs. Diseconomies of scale are rarer than economies of scale and they are often offset by economies of scale that exist in the same business. This can make it hard to decide which will have more effect.

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For example, there is evidence that diseconomies of scale exist in pharmaceutical companies’ research and development. There are undoubtedly economies of scale in manufacturing and marketing. The latter are also important costs. They will usually outweigh R  combined, and often alone, but R  is a growth driver and its efficiency has a strategic importance they lack. Is Bigger Really Better? There is a worldwide debate about the effects of expanded business seeking economies of scale, and consequently, international trade and the globalization of the economy.

Those who oppose this globalization, as seen in the demonstrations held outside World Trade Organization (WTO) meetings, have claimed that not only will small business become extinct with the advent of the transnational corporation, the environment will be negatively affected, developing nations will not grow and the consumer and workforce will become increasingly less visible. As businesses get bigger, the balance of power between demand and supply could become weaker, thus putting the company out of touch with the needs of its consumers.

Moreover, it is feared that competition could virtually disappear as large companies begin to integrate and the monopolies created focus on making a buck rather than thinking of the consumer when determining price. The debate and protests continue. Conclusion The key to understanding Economies of Scale and Diseconomies of Scale is that the sources vary. A company needs to determine the net effect of its decisions affecting its efficiency, and not just focus on one particular source.

Thus, while a decision to increase its scale of operations may result in decreasing the average cost of inputs (volume discounts), it could also give rise to diseconomies of scale if its subsequently widened distribution network is inefficient because not enough transport trucks were invested in as well. Thus, when making a strategic decision to expand, companies need to balance the effects of different sources of Economies of Scale and Diseconomies of Scale so that the average cost of all decisions made is lower, resulting in greater efficiency all around.

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