Diseconomies of Scale


Economies of increasing size do not continue indefinitely. After a certain point, any further expansion of the size leads to diseconomies of scale. For example, after the division of labour has reached its most efficient point, further increase in the number of workers will lead to a duplication of workers. There will be too many workers per machine for really efficient production. Moreover, the problem of co-ordination of different processes may become difficult. There may be divergence of views concerning policy problems among specialists in management and reconciliation may be difficult to arrive. Decision-making process becomes slow resulting in missed opportunities. There may be too much of formality, too many individuals between the managers and workers, and supervision may’ become difficult. The management problems thus get out of hand with consequent adverse effects on managerial efficiency.

The limit of scale economics is also often explained in terms of the possible loss of control and consequent inefficiency. With the growth in the size of the firm, the control by those at the top becomes weaker. Adding one more hierarchical level removes the superior further away from the subordinates. Again, as the firm expands, the incidence of wrong judgements increases and errors in judgement become costly.

Last be not the least, is the limitation where the larger the plant, the larger is the attendant risks of loss from technological changes as technologies are changing fast in modern times.


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