Question

why long term rising due to economic scale and diseconomies of scale and what causes all the problems?

Answer 1

Economies of Scale refers to situation when due to large scale production the company is able to reduce the cost per unit of output. Economies of scale enable a company to enjoy cost benefits due to increase in volume of production. The reduced cost benefit is not only enjoyed by company but by also by consumer as the price is also reduced.

Example.Suppose you have a large family and you buy bulk quantity of regular use biscuits and rusks . The shopkeeper will give you some discount as you have made bulk purchase. The shopkeeper has saved on packaging , transportation and other costs. The same benefit is passed on to consumer.

Reasons of Economies of Scale

• Bulk purchase leads to huge discounts.
• Machinery and building usage is paid for same amount.
• Salary of the staff managerial staff remains same.
• Sales and Marketing cost also remain same as these are not dependent on the quantity of production.

Diseconomies of scale refers to situation when firm cost of per unit of output increases along with increase in total production. In the long run the firm stops enjoying economies of scale , rather the economies of scale turns into diseconomies as the production of the firm increases to a large extent.

Example When a firm opens many branches in different states within a country or in different countries coordination and management becomes difficult .This results in diseconomies of scale.

Reasons

• Communication Gap between top management and employees.
• No coordination between different departments and branches resulting in poor management.
• Employees may not able to share their problems with owners and managers may be unwilling to solve the problems. This results in employee dissatisfaction and low productivity.
• The company may operate in uncompetitive markets. This leads to waste of resources and ineffeciency.