Sample Coursework Paper on How Large Firms Can Alleviate Diseconomies of Scale

Diseconomies of scale are drives that cause corporate and parastatals to suffer because of their size. Diseconomies of scale cause an increase in production costs in these firms. Large firms can mitigate the outcome of diseconomies of scale through effective management and organization. Diseconomies of scale result in an increase in cost over an increase in output (JWI, Lecture one, p.8). There are two types of Diseconomies of scale; internal Diseconomies of scale and external Diseconomies of scale.

Internal Diseconomies of the scale include managerial and labor inefficiency. In large firms, communication tends to be ineffective between managers and employees. Therefore, resulting in employees being more reluctant in their duties and this leads to low output at a high cost. Employees become crowded in large firms rendering them ineffective with minimal motivation to attend to their duties. All these lead to an increase in the long-run average cost.

Output

Economies of scale                                        Diseconomies of scale

Y-axis – cost/revenue

  • Chart for LAC

Large firms can solve these problems by introducing better and effective management, reorganization. Managing entails control of production, finance, and sales. A large firm can proactively decide to break down into small firms by restructuring its management. This can be done by having different departments in the firm make decisions independently. For example, purchasing decisions could be made independently by having different units choose their own suppliers. Also by involving employees in the firm decision-making through letting them own a part of the firm would motivate them to work hard and yield high output.

External factors of Diseconomies of scale include competition from new entrants in the market through labor competition and the increased price of labor. Another external factor is a situation where the prices are controlled by the market forces. The large firms become the price takers, the market determines the prices and the firms assume the price (JWI, Lecture two, p.3). A situation where the market price is higher than the production input may result in diseconomies of scale to that particular firm.

Large firms should adapt to being price makers to avoid an increase in per-unit cost caused by the market price. The firm should control so much of an industry’s production that their decisions effectively set the price of goods and services. These large firms should control potential entrants from the market. They should restrict new firms from entering the market so that they can avoid a significant threat to price-output decisions among existing members of the industry (JWI, Lecture two, p.3).

Example

A solar appliances company might prefer high prices for their products and high wages. If they were to have several other firms selling solar appliances in the market this would result in high competition, Hence, affecting the pricing in the market and also the availability of the labor force. Strict laws on new entrants may resolve this problem.

It is difficult to determine exactly when diseconomies of scale set in and outweighs economies of scale (Mukherjee, 2002, p.320). In large firms where economies of scale are negligible, diseconomies of scale may become important causing cost to rise faster than total output.

References

Jack Welch Management Institute. JWI 515 Managerial Economics (week 5 Lecture one & two). Strayer University.

Mukherjee, S. Modern Economic Theory. (2002). New Delhi: New Age International Publishers. Web. 30 Oct 2014.

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