BUSINESS

Diseconomies of Large Scale Production:

The economies of scale cannot continue indefinitely. A time comes in the life of a firm or an industry when further expansion leads to diseconomies in place of economies. Internal and external diseconomies are, in fact, the limits to large scale production which are discussed below.

 

(1) Financial Diseconomies:

An entrepreneur needs finance to expand his business. But finance may not be easily available in the required amount at the appropriate time. Lack of finance prevents the firm from expanding in the required direction and retards its production plans thereby increasing costs.

 

(2) Managerial Diseconomies:

The check to the further expansion of a firm is put due to the failure on the part of the management to supervise and control the business properly. There is a limit beyond which a firm becomes unwieldy and hence unmanageable. Supervision becomes lax. Workers do not work efficiently, wastages arise, decision-making becomes difficult, coordination between workers and management disappears and production costs increase.

 

(3) Marketing Diseconomies:

The expansion of a firm beyond a certain limit may also involve marketing problems. Raw materials may not be available in sufficient quantities due to their scarcities. The demand for the products of the firm may fall as a result of changes in tastes of the people and the firm may not be in a position to change accordingly in the short period. The market organisation may fail to foresee changes in market conditions whereby the sales might fall.

 

(4) Technical Diseconomies:

A large scale firm often operates heavy capital equipment which is indivisible. Its aim is to maximise profits which it does by equalising its marginal costs with the price (marginal revenue) of the product. Under perfect competition, it might produce at its minimum average cost in the long run. However, due to the presence of the diseconomies of finance, marketing or management, the firm may fail to operate its plant to its maximum capacity. It may have excess capacity or idle capacity. For example, if the plant can manufacture 2000 units of the commodity per day, the firm may be producing 1500 units per day. Thus the firm operates below its full capacity. As a result, cost per unit increases.

 

(5) Diseconomies of Risk-Taking:

As the scale of production of a firm expands, risks also increase with it. An error of judgment on the part of the sales manager or the production manager may adversely affect sales or production which may lead to great loss.

 

(6) External Diseconomies:

If an industry expands as a whole, its growing demand for the various factors of production, like labour, capital, raw materials, etc. may eventually raise their prices. The localisation of industries may lead to shortages of transport, power, labour, raw materials and equipments. All such external diseconomies tend to raise cost per unit.