Diseconomies of Scale | Factors of diseconomies limiting size of firms

The economies or advantages of large scale production are not available beyond a certain production level. When a firm expands beyond an optimum limit, it begins to suffer from dis-economies. These dis-economies lead to increase in the average cost of production.

Factors of diseconomies limiting size of firm

The following factors of dis-economies limit the size of the firm:

1. Difficulties of management: As a firm expands, complexities and problems of management increase. Supervision, coordination and control become difficult. Lack of effective supervision and control might lead to inefficiencies, frauds and overall mismanagement.

2. Difficulties of co-ordination: The tasks of organization and co-ordination become increasingly difficult. Management would face numerous problems in running the organization.

3. Difficulties in decision making: A large firm cannot take quick decisions. Many people have to be consulted and many factors have to be considered. This results in delayed decisions. The firm would be slow in reacting to problems and cannot take advantage of opportunities.

4. Increased risks: Business risks also increase with the increase in scale. The larger the output, the greater would be the loss, if products are not sold out in the market. Any error in judgement can cause huge losses to the business.

5. Labour dis-economies: There is high level of mechanization and division of labour is implemented. Workers do the same task for a number of years. This results in monotony, boredom and lack of interest in the job. Their concentration and motivation levels are low leading to absenteeism, accidents, grievances and industrial disputes.

6. Financial difficulties: A large scale firm requires huge capital. Meeting the high funds requirements is not always possible. In case of dull capital markets, investors may not be ready to invest. Banks may not come forward to lend loans beyond a certain limit. Difficulty in obtaining sufficient funds may hinder further expansion and growth.

7. Marketing dis-economies: When the industry expands, competitor becomes intense. Retention of existing customers and attracting new customers become difficult. Substantial amount of money needs to be spent on advertising and sales promotion activities. Distributors may demand higher profit margins, increased credit period etc. This results in higher expenses and low profits for the large scale manufacturer.

8. Increase in factor costs: As a firm grows and production level increases, the demand for factors of production (land, labour, capital) increases. Factors of production need to be paid more (land-rent, labor-wages, and capital-interest). This increases the cost of production and lowers profit margins.

9. Problem of oversupply: Where there are many large scale firms in an industry, the problem of over supply might arise. Production may be more than the actual demand which would lead to a fall in prices. Organizations would also face the problem of huge unsold stock. They might have to offer high discounts to clear their stocks.