Study Economics notes on Large firms vs small firms: economies and diseconomies of scale for Secondary. Useful for revision, homework, and exam preparation in Zimbabwe.
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Do you agree that large firms are always better than small firms? Justify your answer. ( 25 marks) Large firms can experience certain advantages that small firms cannot achieve thus can be argued to be better; however this may not always be true as they may also face disadvantages for example from diseconomies of scale. Furthermore the market is fundamental to determine if large firms are better than small firms, as perfectly competitive and monopoly markets varies the advantages and disadvantages of being a small or large firm. Large firms tend to benefit more due to several factors from economies of scale; this means that the firm can benefit from falling average costs in the long run - however small firms cannot achieve such benefits. For example purchasing benefits whereby large firms are able to bulk buy raw materials as they are producing on a larger scale thus are able to receive discounts and therefore reducing production costs. Or they may experience technical economies whereby investment in more advanced machinery or larger premises will allow firms to experience increasing returns to scale where output is greater than input thus improving productive efficiency through division of labour and specialisation resulting again in lower costs. Economies of scale can be illustrated in diagram 1, whereby when output increases (Q to Q1), cost decreases ( C to C 1 ). Minimum efficient scale is illustrated at the constant part of the LRAC labeled QA firms are operating at the optimum point experiencing constant long run average costs where economies of scales are exhausted; the firm therefore is operating at long-run productive efficiency. This is the reason why large firms are considered to be better than small firms. However as the LRAC curve rises; large firms will experience diseconomies of scale. For example as a firm grows control becomes more difficult, monitoring productivity of each worker in a large firm will become more challenging thus may result in a loss of productive efficiency and therefore rising average costs. Additionally coupled with poor communication and coordination due to increasing size of firms increasing average costs are accelerated. Furthermore as large firms are often public limited companies ownership and control is often divided among a group of shareholders thus control over the firm is not subject to one person and instead are run by several directors who carry the interest of the shareholders. This makes management over …