The economies and diseconomies of scale Profit is the most important issue for a business, how to exploit the opportunities and maximize the profit has long been the top priority of the competition. Since the profit is simply the result by subtracting the expense from income, how to balance the relationship between input and output can be crucial and conclusive to a firm’s competitiveness and development. This essay will examine the issue of economies and diseconomies of scale. After first describing the types, it will consider its effects. Then, the essay will assess firms’ decision towards diseconomies of scale and provide solutions.
There are several types of economies of scale. One type of internal economies of scale is the Technical economies. Anderton (2000:320) states that the increasing and decreasing retributions to scale in return is the reason economies of scale exist, which is known as technical economies. They can arise in the production progress and the firm would benefit from better machinery. Sloman (2001:96) notes that large machines may be more efficient in the sense that more output can be gained for a given amount of inputs. For instance, no matter the size of a machine is, normally it can be operated by a single worker.
Therefore a small-scale business could not make full use of one. This introduces the concept of “indivisibilities”. It’s less likely to occur when the ratio of output is continuously increasing. However, the average cost of the machine will fall as the level of usage goes up. What’s more, Maunder (1992:327) clarifies the close connection between the principle of increased dimensions by stating that in the size of a globe enlarge more than commensurately within its length of the closed curve. In a word, the costs were in slow growth while the capacity has grown several times.
The Term Paper on Scale Economies on Wireless Telecommunications Industry
Telecommunications Policy 33 (2009) 29–40 Contents lists available at ScienceDirect Telecommunications Policy URL: www. elsevierbusinessandmanagement. com/locate/telpol Estimating scale economies of the wireless telecommunications industry using EVA data$ Changi Nam a, Youngsun Kwon a,A, Seongcheol Kim b, Hyeongjik Lee c a b c School of IT Business, Information and Communications University, 119, ...
Another type of internal economies of scale is the managerial economies. Since the firm could have managed to pay for specialist staffs. Hall (2004:590) explains this through a vivid example that in a relatively small firm one executive has to be responsible for servicing, transporting, marketing. Similarly, every worker has to do many jobs and hardly possible to settle in an area of expertise if it is a small firm. Unlike those firms which are at low output levels, larger enterprises possess with rich and qualified personnel provide every single worker enough freedom to focus on one task and thus handle it more efficiently.
Financial economies is a further type of internal economies of scale. It’s obvious that tycoons have overwhelming superiority towards small firm when they try to raise finance. Maunder (1991:327)makes the pointed remark of it that the large firm can easily negotiate loans and enjoy favorable interest rates from banks and other loan institutions, or even form a consortium to provide sufficient fund for project since they will have large assets to offer as security.
Hall (2004:590) adds more evidence that large public limited companies can raise money by selling stock which the private firm cannot ever do. So far the essay have been demonstrating the internal economies of scale. However, the outside factors like the growth in the size of the industry in which the specific firm operates can have positive Impact on the economies of scale—-external economies of scale. Bannock(2001:115) illustrates it will arise because the enlargement of an industry can lead to the development of ancillary services of benefit to all firms.
The Essay on Notes on Economies and Diseconomies of scale
?There are benefits and drawbacks in increasing the size of operation of a business. The cost advantage is known as economies of scale. The cost disadvantage is known as disecomonies of scale. The benefits of large-scale business Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall because of: Purchasing economies when large ...
For example, government might pick up pace in building and improving the local transportation systems due to the rapid growth of industry, which in turn reduces costs to individual firms Having described the variety types of economies of scale, the essay will now consider it in diseconomies of scale. The continuous expanding will lead to an exactly opposite effect on gaining profit. As firms continue their expansion, when it gets beyond a specific size, the cost per unit of output may show a distinct tendency—-start to increase.
The scale as mentioned above is called “diseconomies of scale”. Hall(2004:591) explains this through internal and external diseconomies. First of all, the internal diseconomies of scale are always arise mainly because of the problems of managing increasingly businesses. As firms grow larger and develop in many fields, the boundaries between each individual department would become smeared which may lead to potential conflict.
In order words, it’s a major concern for a large firm to reach mutual understanding between different sectors. A large firm is more like a complex system which involving many departments and staffs and information as well as hard organization and coordination. Hall(2004:591) claims that it is undoubtedly demanding and implacable to manage and coordinate more than thousand of staffs, billions of pounds, trillions of information and dozens of plans which all mean added effort,duty and surveillance.
In addition, Labour problems can be another reason for causing internal diseconomies of scale. Sloman (2001:97) comments that workers might feel ” alienated “and “isolated” if their job is both tedium and reduplicative. For example, as the expansion of the company, employees would gradually consider themselves as plain and insignificant as a gear in a giant machine. Stress, depression and similar negative feelings often result in shoddy work thus reduce the efficiency of their work.
Hall(2004:591) agrees this by stating that this feeling can make individual staff suffer from losing morale and confidence in reaching higher achievement. What’s more, despite the internal diseconomies that might limit the growth of business, external diseconomies would arise as well as Hall(2004:591) furthers his view that it is an inevitable part of the outcome of the overcrowding in industrial areas. Rentals, labor cost, raw and processed materials might rise as firms are all in intense competition for a limited amount indent.
The Term Paper on Economies Of Scale 2
Definition Reduction in long-run average and marginal costs, due to increase in size of an operating unit (a factory or plant, for example). Economics of scale can be internal to a firm (cost reduction due to technological and management factors) or external (cost reduction due to the effect of technology in an industry). Diseconomies of scale Definition Increase in long-term average cost of ...
In terms of the views above, Sloman(2001:97) gives strong supports that the shortage of skilled labor and customized raw materials will growing as well as the development of the whole industry, which will result in an inflation of prices and therefore hence the firms’ costs. Since there is an inherent limitation to the efficient functioning of management as Maunder(1991:328) mentioned. Enforce the rules and regulations of the firms and simplify the management systems and governance procedures can not only reduce the cost of supervising works, but also raises employee’s self-managerial ability and working efficiency.
Another effective way of doing this is by improving the communication networks. As the limitation of geography cannot be wiped out thoroughly, Hall (2004:591) suggests firms to control the transportation cost and improve the convenience of the provision of services. Last but not the least advice might be keeping the firm in a relatively small scale. perhaps it is the best simple recipe for getting rid of diseconomies of scale.