INTERNAL DISECONOMIES OF SCALE AND WHY A

FIRM MAY EXPERIENCE IT REASONS FOR A RISE

IN THE LONG-RUN AVERAGE COST
Rise in Long-run Average Cost

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In the long-run of production all inputs or factors of production can be varied. In other words the firm has
reached that stage of production where it can increase its output by employing more of all the factors of
production. It can for instance hire more labor, acquire more capital equipment, purchase more land area
for expansion etc. Enough time has elapsed for these to be possible. We say in the long-run the plant
size or scale is adjusted in order to change the output level, because all inputs are variable in the longrun.
If all inputs of production of a firm are increased by some percentage and output increases by a lesser
percentage, then that firm experiences decreasing returns to scale. For example, if all inputs are
increased by 20% and this leads to a lesser percentage increase in output, say 15% or anything less than
20%, then that firm experiences decreasing returns to scale.
WHY A FIRM MAY EXPERIENCE DECREASING RETURNS TO SCALE
When a firm expands its production scale beyond a certain level, it suffers certain disadvantages. These
disadvantages are called internal diseconomies of scale. The result of this diseconomies of scale is a
fall in output and increase in the long-run average cost. There are a number of factors that might give rise
to inefficiencies as the size of the firm grows.

As the size of the firm grows beyond a certain level, organization, control and planning is needed. This
makes the administrative duties more difficult. Delegation of much of the management functions to lower
personnel becomes very common. Since these personnel lack the requisite experience to undertake the
task, it may result in low output at higher cost. Again it is often difficult to arrive at quick decisions since
large firm often have many directors and departmental heads, through whom suggestions must pass
before they are implemented. All these lead to an increase in the long-run average cost.
As the firm increases in size, management-employee relation becomes impersonal. This means
supervision would be relaxed. Labor may resort to lateness and absenteeism. In short, workers work less
efficiently.
The increase in the size of the firm may lead to labor diseconomies. Workers become so crowded that
space needed for each worker to work efficiently becomes minimal. Over-specialization and division of
labor creates over-dependence. This situation can be detrimental to the firm if one worker should be
absent. All these cause an increase in the long-run average cost of production.
Advertising expenses may increase, as the problem of distribution and marketing increases due to an
increase in the size of the firm.