Answer to Question #214261 in Microeconomics for Mubashir Ameenudee

Question

What are the reasons behind a firm experiencing economies of scale first, followed by

diseconomies of scale?

Answer 1

When a firm grows, the average cost of producing a product drops. This is known as economies of scale. Diseconomies of scale, on the other hand, arise when the cost of producing the product rises, making it more expensive.

Reasons why a firm experiences Economies of Scale first followed by diseconomies of scale

1. Purchasing

Firms can reduce their average costs of production by purchasing inputs for the manufacturing process in massive numbers or from specialized wholesalers. However, too much cash or poor procurement practices might lead to poor purchase decisions hence raising the average production costs and this is where diseconomies of scale come about.

2.Organisational

Firms may be able to reduce their average expenses by strengthening their internal organizational structure. This might include bringing in better-qualified or more experienced management from within the industry. Diseconomies of scale arise in that as the firm expands, there is a lack of effective communication across departments leading to poor management decisions

3.Technological

Improvements in technology will transform the manufacturing process, lowering the overall unit cost.However when all of the industry's businesses develop, there is a greater need for more improved technology, and input prices begin to climb, resulting in a rise in production costs.