Decreasing returns to scale or diseconomies of scale implies rising average costs (AC) as the firm’s output and scale increase (Samuelson and Marks). Samuelson, William, and Stephen G Marks. Managerial Economics. 6th ed. Hoboken, NJ: John Wiley and Sons, 2006. Print.
Economies of scale takes place with the growth of the firm. A business faces diseconomies of scale when the management team fails to keep economies of scale in check.Both, internal and external growth can lead to diseconomies of scale and affect the growth of the firm.
Diseconomies takes place when the Transaction cost (TC) of the company rises. Transaction costs refer to …show more content…
With the introduction of the world wide web the method of communication, especially within the businesses was revolutionised with cost effective methods of communication such as email. The developments in the hardware and software industry also hampered TC. Air and ocean freight have decreased over the years. Trade agreements and free economic zones (EU, NAFTA, WTO) help reducing costs by preventing customs and reduce barriers to …show more content…
Internal diseconomies can take place if a machine is being over-used. which leads to increase in total cost. Firms become more complex and less flexible when sales increase, to increase output, the business must pay extra wages and employ extra workers which raises TC. If the managing body overlooks diseconomies of scale and continues to let the total cost of production rise the firm will have to suffer losses and effect the business growth.
A good manager can help a firm achieve economies of scale but it takes an even better manager and strategist to avoid diseconomies of scale. A manager needs to focus on both maintaining the business growth and preventing diseconomies at the same time. An efficient managing team can prevent diseconomies of scale if the team is quick to respond. Over the years the transaction cost has been dropping due to developments in every industry the managers have opportunity to combine scale and efficiency and continue to grow.
The three main types of diseconomies