Why are many firms likely to experience economies of scale up to a certain size and...

Why are many firms likely to experience economies of scale up to a certain size and then diseconomies of scale after some point beyond that?

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The economies of scale is the phase of production when a firm experiences decreasing average cost of production with the increase of output. The diseconomies of scale happens when the average cost of production rises with the increase of output. When a firm expands its plant size or starts production in large scale, its entrepreneurial efficiency, skilled and experienced workforce, improved technology, etc. help in reducing unit cost of production. As a result, the firm experiences economies of scale. But in many cases, this economies of scale happens up to a certain size or output level, beyond which, the firm experiences diseconomies of scale. By expanding the plant size gradually, at certain stage of production, when it's too large, it becomes very difficult to coordinate and manage the entire production operations. As a result, the division of labor, improved macinery, etc. do not help in reducing the cost of production; instead the lack of coordination increases the cost of production if the plant size is increased further. So, after reaching the optimum plant size, at which. the firm experiences lowest average cost of production, or the maximum economies of scale, the firm likely to experiences diseconomies of scale with the further increase of the plant size,

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Rahul Sunny answered 1 year ago

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