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Describe some conditions that might cause large firms to experience inefficiencies that...

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gutierrezsally | Student, Undergraduate | (Level 2) Honors

Posted November 27, 2011 at 2:25 PM via web

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Describe some conditions that might cause large firms to experience inefficiencies that small firms would not experience.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 31, 2013 at 3:55 PM (Answer #1)

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In economics, the situation that you mention here is called “diseconomies of scale.”  It is the opposite of economies of scale.  In the case of economies of scale, large companies are able to produce at a lower cost per unit than smaller companies.  When there are diseconomies of scale, the opposite is true.

Diseconomies of scale usually come about because of problems of motivation and of communication in large companies.  A classic example of this is a company that has grown too large and too bureaucratized.  When the company is small, the workers can talk directly to the owner.  They can tell the owner when things are going badly and changes can be made rapidly.  When the company gets bigger, this can no longer happen.  In a really big company, a low level worker tells a supervisor about a problem.  That supervisor tells a manager who tells another, higher manager, and so on.  It takes a long time for this process to happen and it may take a long time for the upper management to collectively agree on what to do.  This is much less efficient than the small company where the problem could be fixed immediately.

Another possible problem is a lack of motivation.  Workers in large firms may well feel like cogs in a machine.  They may feel that they are not really relevant and so they will not work as hard.  By contrast, workers in a small firm might feel like an important part of the company.  They will feel that their individual efforts matter and they will work hard.  This makes their firm more efficient.

In these ways, and others, small firms can sometimes be more efficient than big ones.

The most likely way that this would happen is through excessive bureaucratization of the firm.  This is much more likely in a large firm than in a small firm.

In a large firm, it is often necessary to create layers of bureaucracy.  This could end up creating higher costs without adding to productivity.  In addition, these layers of bureaucracy might make it harder for firms to remain agile.  They might develop a bureaucratic mentality rather than a more creative mentality.  When this happens, they might become much less able to adapt to changing conditions or to innovate.

In these ways, large firms might come to be less efficient because they need larger bureaucracies than small firms do.

 

These types of inefficiencies are generally known as diseconomies of scale.  They generally occur due to excessive bureaucracy.

When firms get very big, they tend to become bureaucratized.  This means that there come to be large numbers of employees who are not directly involved in the production process.  It can often be the case that these employees (doing managerial jobs) do not add as much to the company's production as they cost.  In that case, the larger firm comes to be less efficient than a firm that is too small to have so much management.

 

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lilylee | Student, College Freshman | (Level 1) Salutatorian

Posted May 31, 2013 at 4:12 PM (Reply #1)

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Thank you very much for helping me to figure this question!

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