What causes Diseconomies Of Scale?

Answer 1

Although economies of scale have the potential to increase both consumer and producer welfare, there are limits to the advantages that they can bring. It is important to be aware of some of these. Limited market demand: The size of the market may be insufficient for any one business to fully exploit the available scale economies. Large, indivisible units of capital equipment have the potential to produce high levels of output - but if demand is at a low level, capital will be underutilised leading to excess capacity and rising average total costs. Occupational immobility of capital: Some large units of capital may not be transferable to other uses if there is a switch in consumer demand. A firm may grow beyond the scale of production that minimizes long-run average cost. The rise in LRAC is caused by diseconomies of scale.

It is often difficult to pinpoint exactly the causes of diseconomies of scale. However management theorists often point to the following factors. Control - monitoring how productive each worker is within a large business is both imperfect and costly. This can lead to a loss of productive efficiency if worker shirking is common Coordination - it is difficult to coordinate complicated production processes and they may break down. Achieving efficient flows of information is expensive Cooperation - workers in big firms may feel a sense of alienation, perhaps perceiving that they don't really belong and this may affect their productivity adversely.