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Chapter 11: Problem 12

In his autobiography, T. Boone Pickens, a geologist, entrepreneur, and oil company executive, wrote: It's unusual to find a large corporation that's efficient.... When you get an inside look, it's easy to see how inefficient big business really is. Most corporate bureaucracies have more people than they have work. Was Pickens describing diminishing returns or diseconomies of scale? Briefly explain.

Short Answer

Expert verified
T. Boone Pickens is describing 'Diseconomies of Scale' in his statement.

Step by step solution

01

Understanding concepts: Diminishing Returns

To start, it's crucial to note that 'diminishing returns' is an economic concept that takes place when increasing numbers of a certain input lead to smaller and smaller increases in output. It happens when an input variable is increased incrementally, while all other variables are held constant. However, after certain point, the output will decrease or will increase at a very slow rate as compared to the input.
02

Understanding concepts: Diseconomies of Scale

On the other hand, ‘diseconomies of scale’ refers to a situation where as a firm increases in size, its costs per unit start to rise. The higher expenses might be due to management problems caused by the operation’s larger size, offices being too far apart, ineffective communication, or a decrease in productivity and motivation of the workforce.
03

Applying the Concepts to the Statement

Given the statement, The author describes a situation where large corporation has more employees than they have work to dedicate to, a quite common situation where large corporations face management issues such as ineffective communication due to their size. Therefore, Pickens is illustrating 'Diseconomies of Scale'.

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