Learn thanks to this article in detail the concepts of Diseconomy of Scale, we will explain all their classifications and much more.
Diseconomy of Scale
It is the result generated in the costs of a specific production. These effects generate increasingly higher costs for the company for each unit of product that is manufactured. The opposite happens to economies of scale, where the number of units produced is increased, the unit cost is reduced.
Diseconomy of scale occurs when a percentage increase in output is less than the percentage increase in inputs. Diseconomies of scale are classified as external and internal:
internal diseconomies
It is the result of the extension of unique properties. They are normally produced by an increase in the administrative cost in terms of logistics and bureaucratic circumstances, which make an increase in production, an increase in costs. However, this type of economic problem can be prevented through technological improvement that reduces these administrative costs. As for examples:
Interdependence
Large companies with many departments interconnected with each other, for example, a packaging machine that fails in the packaging area can stop the entire production line.
Organization and communication
Long chains of command in which a link fails, for example an indication of the production management that does not reach the operators or arrives distorted.
Industrial relationships
Little or no contact between management and the workforce can make workers feel that their effort is not recognized, and therefore, generate labor disputes that affect production and the feeling that they are not taken into account.
External diseconomies
They are the consequence of the growth of a group of firms, which bring hidden the increase in costs for one or more of the members of the group. Within this type of diseconomies we can find monetary and technological ones.
The damage that a product causes to another or to society without paying compensation is also called external diseconomies. Among the causes of external diseconomies we can mention some examples:
The smoke from a factory annoys the inhabitants of the surroundings, the owner of the factory does not estimate in his accounts the contamination caused by his chimney for his criteria and consideration that event is not under his responsibility, since it is outside his structure physical and does not reach the external part, consequently it does not fall within its cost structure.
If there is a Law that governs the matter of environmental damage, the employer is obliged to consider external damage, within his estimates, as well as collateral damage within his cost structure, and consider the cancellation of damages to third parties in the case it happened.
But they do not have the property of the air and they cannot claim anything, unless a law authorizes them. The practical solution is generally the issuance of some public anti-pollution norm so as to confirm the need for interventions to supply the limitations of the market.
- Monetary: It is generated when the prices of inputs increase disproportionately to the size of the companies.
- Technological: technological backwardness causes costs to increase because the market pushes its demand down, and its price rises.
Causes
- Difficulties in control and supervision.
- Slow decision making.
- Lack of motivation in employees.
Economies and diseconomies of scale are those that occur at the moment a product is manufactured or a service is generated. Each unit has a cost; if that cost per unit goes up, it's diseconomies.
If you want to learn more about how to analyze this, we invite you to enter the following link Commercial strategy
Differences between economies and diseconomies of scale
When referring to economy of scale, we speak of the advantages that companies, organizations and brands have at the time of the production of different products or services. This as a consequence that we can have access to better production costs in raw material or services. Establishing costs that are fixed between the final product and the quantity that is manufactured.
On the other hand, when defining diseconomy, it occurs when inefficiencies occur in organizations within the production line. This occurs when we come across obstacles that prevent us from normal development within organizations, which leads us to make investments that we had not planned.
In short, economies and diseconomies of scale depend fundamentally on the resources of working capital or assigned to an organization to manufacture its products. This makes it necessary to take into consideration the internal and external factors so that its balance does not suffer and to avoid or be prepared for events that may be generated unforeseen.
Diseconomy of scope
It originates when the production of a company as a whole is less than the production of each of the companies separately, each of these generating a single product.