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Diseconomies of Scale

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An analyst in the production department for Chevrolet Caprice stated that "The marginal cost of a Caprice, given our current volume, is $12,500. Of course, the actual marginal cost depends on the number of cars produced. The larger the number produced, the lower the unit cost because we will spread out our design and tooling costs over more cars."

Economies of scale help firms to lower their production cost per unit and therefore, many firms are merged or in the process of merging. However, some large firms may suffer diseconomies of scale. Explain why some firms may suffer diseconomies of scale. Do you know any examples? Could GM be an example of diseconomies of scale?

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Diseconomies of Scale

When the output of a firm increases less than the proportionate increase in all inputs, diseconomies of scale takes place. The diseconomies of scale will result in increase in the long-run average costs and thus give an upward sloping long-run average cost curve. Diseconomies are the disadvantages that arise due to the expansion of production of scale and lead to a rise in the cost of production. Diseconomies begin to appear first at the managerial level due to the expansion of production scale. With fast expansion of the production scale, personal contacts and communications between owners and managers and managers and labor get rapidly reduced. Another source of diseconomies of scale is the overcrowding of labor leading to a loss of control over labor productivity.
On the other hand, increase in the number of workers encourages labor union activities, which simply means the loss of output per unit of time and hence, rise in the cost of ...

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