In this article we will discuss about the economies and diseconomies of scale in a firm.
In the long run, the firm may increase its production by increasing the use of all its inputs. In the initial stages when the size of the firm is rather small, it may increase the quantities used of its inputs and the quantity of its output without encountering any managerial difficulties.
The firm then may enjoy certain economies of scale. For example, the firm may go on reaping the advantages of specialisation and division of labour indefinitely in the long run. Because, in the long run, along with the number of workers, other infrastructural facilities may also increase and the workers may become more and more skilled and specialised.
Economies of scale also generate from technological factors. This is mainly on two counts.
First, it has been observed that the cost of purchasing, installing and operating a larger machine producing a larger quantity of output is not proportionately larger than the cost of a smaller machine producing a smaller quantity of output.
Second, the different types of machines doing different jobs may be combined in a better way in the long run so that wastage due to unused capacity is minimised.
The economies of scale result in lowering the average cost of production in the long run. In other words, these economies of scale give rise to increasing returns to scale, or, outlay, since here output increases more than proportionately with the increase in input quantities or outlay.
But, in the long run, as the size of the firm increases along with its scale of production, beyond a certain limit, the returns to scale, or, outlay may be decreasing, mainly because of managerial difficulties. This would give rise to diseconomies of scale, and increasing average cost in the long run, because now output increases less than proportionately with the increase in the input quantities.