On the one hand, a firm my choose to remain small due to constraints on
managerial capacity and access to appropriately skilled labour. These
constraints may render it more efficient for a firm to remain small, as any
expansion could lead to diseconomies of scale. For instance, in the case of
“Betlehem Olivewood” (a company specializing in crafting olivewood into
various handicrafts), such obstacles may arise when considering growth.
This is because, whilst the owner of the company may excel in
woodcarving, they may lack the requisite skills, resources or expertise to
efficiently manage a larger organization, potentially resulting in decreased
efficiency (and thus rising average costs) if the firm were to expand.
Moreover, given the highly technical nature of the handicraft produced,
Bethlehem Olivewood may struggle to find labour with the suitable skills
to have the capacity to expand operations. Under these conditions, it may
make most sense for Betlehem Olivewood to remain small, as the firm’s
ability to gain from economies of scale is highly limited. As seen in the
figure below, the firm’s minimum efficient scale (MES) is achieved at a
much lower level of output, with any expansion beyond point Q leading to
rising average costs due to potential issues such as unskilled labour
causing manufacturing errors or managerial efficiencies causing poor
communication or coordination due to inexperience with large-scale
operations. As such, under certain circumstances, it may make most
sense for a firm to remain small, as expansion may result in diseconomies
of scale.
managerial capacity and access to appropriately skilled labour. These
constraints may render it more efficient for a firm to remain small, as any
expansion could lead to diseconomies of scale. For instance, in the case of
“Betlehem Olivewood” (a company specializing in crafting olivewood into
various handicrafts), such obstacles may arise when considering growth.
This is because, whilst the owner of the company may excel in
woodcarving, they may lack the requisite skills, resources or expertise to
efficiently manage a larger organization, potentially resulting in decreased
efficiency (and thus rising average costs) if the firm were to expand.
Moreover, given the highly technical nature of the handicraft produced,
Bethlehem Olivewood may struggle to find labour with the suitable skills
to have the capacity to expand operations. Under these conditions, it may
make most sense for Betlehem Olivewood to remain small, as the firm’s
ability to gain from economies of scale is highly limited. As seen in the
figure below, the firm’s minimum efficient scale (MES) is achieved at a
much lower level of output, with any expansion beyond point Q leading to
rising average costs due to potential issues such as unskilled labour
causing manufacturing errors or managerial efficiencies causing poor
communication or coordination due to inexperience with large-scale
operations. As such, under certain circumstances, it may make most
sense for a firm to remain small, as expansion may result in diseconomies
of scale.
