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Chapter 11: Problem 4

What are diseconomies of scale? What is the main reason that a firm eventually encounters diseconomies of scale as it keeps increasing the size of its store or factory?

Short Answer

Expert verified
Diseconomies of scale occur when the cost per unit increases as a firm continues to grow, most often due to increased inefficiencies and complexities in managing and coordinating the firm's operations as its size increases.

Step by step solution

01

Understanding Diseconomies of Scale

Diseconomies of scale occur when a business grows so large that the costs per unit increase. It happens when a company's production increases to the point that the cost of producing each additional unit begins to rise. This can be due to several factors like managerial inefficiencies, increased difficulties in coordinating operations, or even problems with logistics and communication.
02

Identifying the Reason for Diseconomies of Scale

The main reason a firm eventually encounters diseconomies of scale is that as the firm grows larger, it becomes more difficult to manage and coordinate its operations. As the number of employees increases, communication becomes more difficult. Following the decision-making process becomes more complex with multiple layers of management. This leads to inefficient use of resources and higher per unit costs.
03

Real-life Application

For example, if a firm continues to increase the size of its store or factory, it may face issues with overstaffing, increased waste due to poor management, and difficulties in maintaining the same level of service or product quality. This shows how as a business keeps increasing its scale, diseconomies may kick in and the costs per unit begin to rise.

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