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Diseconomies of scale .docx

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University of Manitoba
ECON 1010
Sarrah Vakili

Diseconomies of scale Diseconomies are the result of decreasing returns to scale. The potential diseconomies of scale a firm may experience relate to: 1. Control – monitoring the productivity and the quality of output from thousands of employees in big corporations is imperfect and costly – this links to the concept of the principal-agent problem – how best can managers assess the performance of their workforce when each of the stakeholders may have a different objective or motivation which can lead to stakeholder conflict? 2. Co-ordination - it can be difficult to co-ordinate complicated production processes across several plants in different locations and countries. Achieving efficient flows of information in large businesses is expensive as is the cost of managing supply contracts with hundreds of suppliers at different points of an industry’s supply chain. 3. Co-operation - workers in large firms may feel a sense of alienation and subsequent loss of morale. If they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs. Traditionally this has been seen as a problem experienced by large state sector businesses, examples being the Royal Mail and the Firefighters, the result being a poor and costly industrial relations performance. However, the problem is not concentrated solely in such industries. A good recent example of a bitter dispute was between Gate Gourmet and its workers. Avoiding diseconomies of scale A number of economists are skeptical about diseconomies of scale. They believe that effective management techniques and the appropriate incentives can do much to reduce the risk of rising long run average costs. Here are three reasons to doubt the persistence of diseconomies of scale: 1. Developments in human resource management (HRM) are an attempt to avoid the risks and costs of diseconomies of scale. HRM is a horrible phrase to describe improvements that a business might make to any of its c
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