Question

Since economies of scale exist, why do long-run marginal costs increase, ultimately, as output increases?

(in about 600-800 words giving references)

Answer 1

Sometimes, organizations runs after economies of scale for so long that after a particular point, the marginal costs starts to increase as the output increases. This is called diseconomies of scale. This happens when the business grows very large. At this point, economies of scale stops and the reducing costs stop too. This can happen due to many reasons. Mismanagement of human capital is one of them.

It especially occurs when there is operational efficiency in the organization. When there are so many workers for a limited number of machines and or greater number of machines for limited workforce. This lead to lack of coordination and efficiency. This is a point when the firm has actually realized all the cost reducing benefits.

Consider the following diagram. Costs are measured on y axis and output is measured on x axis. Q* is optimum quantity produced. Economies of scale and diseconomies of scale are shown in the diagram. There are these phases which describe the whole phenomenon.

In such a situation, the communication between employees becomes vague and unclear. It happens between most of the individuals, sections or the departments of the organization. One important factor that can lead to diseconomies of scale is the lack of incentive for the worker to produce effectively. Generally firms are bigger n size and the workers have the mindset of rich organization. They think that nothing will happen if they skip the work. This leads to the fall in productivity.

Another reason could be increase in management costs of the administration. As firms grows bigger and further bigger, they have maintain more records, employ more worker, purchase more machinery. These all things collectively lead to the lower efficiency and increasing per unit costs.

So, these were the factors that happen to create diseconomies of scale. It has been experienced by major institutions also. To tackle such a problem, the firms have to realize it and make changes in the production process.