ECON-221 Lecture Notes - Lecture 18: Marginal Revenue, Perfect Competition, Isoquant
20 Aug 2020
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Document Summary
There is always an optimum level of capacity and increases in scale beyond this level lead to diseconomies of scale which manifest themselves in rising average costs of production. Diseconomies of scale have several sources, including: managerial difficulties - it becomes increasingly difficult to control and coordinate the various activities of planning, product design, sales promotion and so on as firms grow. This is especially true where a diverse range of products is produced: low morale - this leads to high rates of absenteeism and lack of punctuality. Additionally, when firms produce on a large scale, the power of trade unions to negotiate wage awards in excess of the growth of productivity thus increasing average labor costs. The decision about the optimal output can be explained by (1) cost outlay or (2) by the given level of output. The firm can have a given amount of money to spend in hiring a given input.
