Question

In at least 200+ respond to the following (please include any references used)

Take a look at the following information and answer the question below:

If long-run average costs are constant with respect to output, then you have constant returns to scale.

If long-run average costs rise with output, you have decreasing returns to scale or diseconomies of scale.

If long-run average costs fall with output, you have increasing returns to scale or economies of scale. Every company is trying to reach economies of scale. However, it is not always possible. What are some of the things that could keep a company from reaching economies of scale? Why?

Answer 1

Every company tries to reach economies of scale, meaning that they would want average cost to drop as they increase the output. This would allow them to maximize their profit, assuming that price doesn't fall proportionately as their average cost falls. Alternatively, it would allow them to remain competitive as the market price of the product they produce falls with more producers entering the market.

It is, however, not always possible. There are several reasons, some of which are described below:

• When firms are small they are not able to take advantage of specialization of labour and machinery, leading to same workers doing multiple jobs. This prevents them from reaching economies of scale
• Larger firms are able to take advantage of better prices from their suppliers and better terms from their financial institutions. Small firms don't have this advantage preventing them from reaching economies of scale
• Firms can spread their (fixed) administrative / managerial costs over a larger number of units, as they grow. Small firms don't have this benefit
• On the external side, there are external economies, which may not be available to firms (irrespective of their own size). These are better infrastructure for a particular industry, specialized suppliers, trained manpower, etc. If these do not develop, then no firm can reach economies of scale in a particular industry
• On the other hand, once a firm reaches economies of scale, it is easy for it to 'go over the cliff' and suffer diseconomies of scale, which could be due to poor internal communication and coordination which large firms typically have