Diminishing Returns vs Diseconomies of Scale
Diseconomies of scale and diminishing returns are both concepts in economics that are closely related to one another. Both these concepts represent how the company can end up making losses as inputs are increased in the production process. Since these concepts are quite similar to one another, they are easily confused as the same. The article provides a clear overview of each concept and explains similarities and differences.
What is Diminishing Returns?
Diminishing returns (which is also called diminishing marginal returns) refers to a decrease in the per unit production output as a result of one factor of production being increased while the other factors of production are left constant. According to the law of diminishing returns, increasing the input of one factor of production, and keeping other factor of production constant can result in lower output per unit. This may seem strange as in common understanding it is expected that the output will increase when inputs are increased. The following example offers a good understanding of how this may occur.
Cars are manufactured in a large production facility, where one car requires 3 workers in order to assemble parts quickly and efficiently. Currently, the plant is understaffed and can only allocate 2 workers per car, which increases production time and results in inefficiencies. In a few weeks as more staff is hired, the plant now is able to allocate 3 workers per car, removing inefficiencies. In 6 months, the plant is overstaffed and, therefore, instead of the required 3 workers, 10 workers are now allocated for one car. As you can imagine, these 10 workers keep bumping into one another, quarrelling and making mistakes. Since only one factor of production was increased (workers) this ultimately resulted in large costs and inefficiencies. Has all factors of production increased together, this problem would have most likely been avoided.
What is Diseconomies of Scale?
Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale, and at which the cost per unit rises as more units are produced. Diseconomies of scale can result from a number of inefficiencies that can diminish the benefits earned from economies of scale. For example, a firm produces shoes in a large manufacturing facility 2 hours away from its shop outlets. The company currently has economies of scale because it currently produces 1000 units a week that only requires 2 truck load trips to transport the goods to the shop. However, when the firm starts to produce 1500 units per week, 3 truckload trips are required to transport the shoes, and this additional truckload cost is higher than the economies of scale the firm has when producing 1500 units. In this case, the firm should stick to producing 1000 units, or find a way to reduce its transport costs.
What is the difference between Diminishing Returns and Diseconomies of Scale?
Diseconomies of scale and diminishing returns show how a company can suffer losses in terms of production output/higher cost when inputs are increased. Despite their similarities, the two concepts are quite different to one another. Diminishing returns to scale looks at how production output decreases as one input is increased, while other inputs are left constant. Diseconomies of scale occurs when the per unit cost rises as output is increased. Another major difference between diminishing returns and diseconomies of scale is that diminishing returns to scale occur in the short run, whereas diseconomies of scale is a problem that a company can be faced with over a longer period of time.
Summary:
Diminishing Returns vs Diseconomies of Scale
• Diseconomies of scale and diminishing returns are both concepts that represent how the company can end up making losses as inputs are increased in the production process.
• Diminishing returns to scale looks at how production output decreases as one input is increased, while other inputs are left constant.
• Diseconomies of scale refers to a point at which the company no longer enjoys economies of scale, and at which the cost per unit rises as more units are produced.
• A major difference between diminishing returns and diseconomies of scale is that diminishing returns to scale occur in the short run, whereas a company faces diseconomies of scale over a longer period of time.