Nov 22 2010

## From short to long: Economies of scale and the long-run average total cost curve

Look closely at the two cost curves below:

The curve on the left is a firm’s short-run average total cost curve. The one on the right represents a firm’s long-run average total cost curve. See the difference?

I didn’t think so. The shape of a typical firm’s short-run and long-run ATC curves may in fact be identical. But there are some very important differences to understand about the short-run costs and long-run costs faced by firms.

The Short-Run: In microeconomics, we define the short-run as the period of time over which a firm’s plant size is fixed. The only variable resource is labor and raw materials, meaning that when demand increases for a firm’s product, the firm is able to increase employee work hours, hire more workers and use existing capital more intensively, but it does not have the time to acquire new capital or expand factory size. Likewise, when demand falls for a firm’s products, it can cut back on work hours, fire workers, but cannot downsize its plants or factories.

The Long-Run: The long-run is defined as the variable-plant period. A firm can adjust the number of all its inputs: land, labor and capital. One way of thinking about the difference between the short-run and the long-run is imagining the long-run as several different short-runs spread out over a larger range of output. The graph below will illustrate this concept for you.

When we examine the long-run ATC more closely, it becomes apparent that there are in fact lots of little short-run ATC curves along the length of the long-run curve. Each of the gray lines in the graph above represent a short-run period in which this firm opened a new factories. There are three distinct phases of this firm’s long-run ATC:

• Economies of scale: As this firm first begins to grow and open new factories, it becomes better and better at what it is producing, is able to get more output per unit of input, and thus experiences lower and lower average total costs as it grows larger. “Scale” is a synonym for size. The bigger the firm’s size, the lower its costs of production: this is called “economies of scale”. My favorite illustration of the concept of economies of scale is to think about two shoe companies: Nike and Luigi’s Fine Italian Shoes. Nike makes shoes in giant factories in Indonesia, ships them in giant containers to all corners of the world in shipments containing 100,000 shoes each. Luigi makes shoes in his basement in Milan, has two employees, and ships shoes one at a time to customers around Europe. Who will have a lower average total cost of producing shoes? Luigi or Nike? Clearly, Nike has economies of scale, Luigi does not. If Luigi were to grow his business, chances are his average total costs would decline.
• Constant Returns to Scale: For the firm above, economies of scale assure that the larger it becomes, the lower its average total costs get. Efficiency in production improves whether through the lower price of inputs achieved through bulk-ordering, its ability to attract and hire skilled managers, the lower per unit cost of shipping larger quantities of products, or other such benefits of being big. At a certain point, however, the benefits of getting larger begin to diminish. This firm’s tenth factory is its minimum efficient scale: The level of total output this firm must achieve to minimize its long-run average total cost. Beyond this level of production, as this firm continues to grow, it will see no further cost benefits; in other words, it will achieve constant returns to scale (size).
• Diseconomies of scale: Why did the Mongol, the British and the Soviet empires collapse? Some historians argue it was because they became too big for their own good. When an organization (whether it’s a country or a firm) becomes TOO big, it begins to experience inefficiencies. When a firm grows so large that it has factories in all corners of the world, a dozen levels of management, and countless opportunities for corruption and miscommunication, its efficiency decreases and its average total costs begin to increase. In the 1980′s General Motor Company began to lose lots of business to smaller Japanese rivals. The outcome was the gigantic corporation broke up into smaller divisions, which then began to operate as different firms. For a while, GM remained competitive, partially because as a smaller firm, it was more efficient and able to compete on cost with its foreign rivals.

Diminishing Returns versus Economies of Scale: A common area of confusion for economics students is the difference between these two seemingly similar concepts. The difference lies in the two curves above, the short-run ATC and the long-run ATC.

• The shape of short run costs (MC, ATC and AVC) are determined by the law of diminishing returns. Since short-run costs are determined by the productivity of the variable resource in the short-run (labor), diminishing returns assures that at first, since a firm can expect to get MORE output for additional units of labor (as fixed capital is used more efficiently) ATC declines as output increases. But beyond a certain point, diminishing returns sets in and the additional output attributable to more units of the variable resource declines. Inevitably, a firm will experience higher and higher average costs as its output continues to grow, since it’s only able to vary the amount of labor used, not capital.
• The shape of long run ATC is determined by economies of scale (and diseconomies of scale). All resources are variable in the long-run, but lower costs cannot be guaranteed the larger a firm gets. At first, efficiency is improved as the firm grows, but at some point it becomes “too big for its own good” and costs start to rise as productivity of resources (land, labor and capital) is inhibited due to the firm’s massive size.

Discussion Questions:

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?
2. Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?
3. Why don’t more companies make jumbo jets?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

### 78 Responses to “From short to long: Economies of scale and the long-run average total cost curve”

1. Gavin Steinhublon 25 Nov 2009 at 8:12 pm

1. A company becomes "too big for its own good" when it reaches a point that it it grows so large it becomes inefficient. This can happen because of many reasons. After a certain point, when the company is so large, they have too many factories or resources to take control of. With factories or production plants all around the world, there would have to be many levels of management, which as the post says, could lead to corruption and miscommunication. Also, the major problem with a firm becoming to large, is that the costs would be massive. In order to run a firm that is so large, there are millions and millions of dollars of costs. Higher wages, capital, and land are all parts of being a mega firm. The Roman Empire was an example of this. It was so large that it became too hard to control and protect, and eventually fell apart.

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2. Jason Fedoron 25 Nov 2009 at 8:15 pm

3.Why don’t more companies make jumbo jets?

It can be very difficult to start a large company like a jumbo jet producer. At low production, costs are very high, because there is a massive fixed cost (factories, techniques,etc.) The only way that some jumbo jet companies can make a profit is by 'spreading the overhead'. When the firm splits the cost of the expensive equipment and techniques required to build jumbo jets among many planes, the Average Total Cost is much lower, and if the company sells them at a price higher than the ATC, they can make a profit. However, it is very hard to start up a company like this, especially when others already are in it, and willing to sell at a lower price and higher quality than a start-up jumbo jet company can.

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3. Amiton 25 Nov 2009 at 8:38 pm

Whenever i talk to my father or brother i find it intriguing that there are so many workers in their respective banks who bring in no income. I ask myself how there are so many positions that deal solely with administrative duties such as managers, human resources, I.t. However through understanding, LR-ATC i understand that these positions are necessary for economies of scale to occur. In order for each additional ATC curve to be more efficient and lower than the previous effective managers must be put in place so that the workers who bring in income are more efficient and the cost of each additional product is lower than before. However, a firm can get "to big for its own good" and the costs of its administrative workers will outweigh the benefit of having additional workers bringing in money. During the international banking crisis, Starbucks was experiencing diseconomies of scale and only realized it once it revenues decreased. Starbucks had to close down stores or face failing.

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4. Lara Fuhrmannon 25 Nov 2009 at 8:40 pm

2.Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

My hometown only has one electricity company, because it takes time to built a big company like electricity. Also everybody uses the other firm it needs time to spread that a new company is built. For example windows and mac. Windows is spread worldwide and windows almost bought every game for the computer. So for different games you need windows. So companys like mac maybe produce good software and computers, but all the games and softwares on the market work with windows, because they bought them. Those industries are a monopoly, so it has barriers to enter this market. It's not easy to enter the market.

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5. Saraon 25 Nov 2009 at 8:41 pm

1. When a firm is so big that it cannot allocate its resources properly, it is not efficient anymore. For example, it has too many branches but no longer the means to sustain its facilities the firm's Total costs start to increase.

To save the firm, they would have to close down some branches until the firm returns to 'Constant returns to scale'.

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6. Felipe R-Lopezon 25 Nov 2009 at 8:45 pm

1.What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

When a firm becomes "too big for its own good", this means that it is entering diseconomies of scale. At a certain point, a firm will not be able to manage effectively, and as the firm gets bigger and bigger, it gets more and more difficult to effectively manage it, hence be competitive. With additional plants and factories, the firm will not get more productive; on the contrary, as management of the whole firm goes down, the average cost will rise. A good non-economic example of this is the Roman Empire. As the empire got bigger and bigger and bigger, it was becoming impossible to manage from Rome, and eventually the Empire split into two, the Occidental and Oriental Roman Empires. However, this system did not last very long, and eventually the Roman Empire was crushed.

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7. [...] WW Blog â€“ Economies of scale and the long-run ATC (Read and respond to the discussion questions as a table group) [...]

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8. Karol Reminon 26 Nov 2009 at 6:48 pm

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

When a firm becomes too big for its own good, it means that the firm is experiencing diseconomies of scale – ATC is rising and workers in the newly opened plant, for example, are becoming less efficient. One of the possible causes for this might be the company's inability to manage the firm in its allocation of resources – for example labor not utilizing capital efficiently. A real-life example would be Wal-Mart. About 1 or 2 years ago, Wal-Mart was about to face a disceconomy of scale as they were opening up new outlets. However, as far as I know, the executives at Wal-Mart came to realize that fairly quickly and decided to focus on their existing retail outlets and slow down with their global expansion of outlets.

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9. Mhairi Hutchisonon 27 Nov 2009 at 4:45 am

3. Jumbo Jets are not a competitive market, this is due to the fact that is takes a lot of time, money and capital to create them. Therefore there are only a few companies that make jumbo jets as they have the ability to produce and ship them for a lower price as they are ordering materials and shipping in bulk quantities. It would be very hard to create a company that makes jumbo-jets over night as it would be too costly and not very likely for the company to gain a large profit in such a short period of time, this is why there are only a few companies that specialize in making jumbo jets.

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10. Ray Remmerton 27 Nov 2009 at 6:00 pm

A company is defined as being "too big for its own good" when is becomes so big it is inefficient. Efficiency decreases and its average total costs begin to increase. This is caused by having too many management teams across the globe which can lead to miscommunication and corruption. Average total costs can increase when the company is forced to increase land, labor, and capital in order to produce the product throughout the world.

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11. Gelando Makrideson 27 Nov 2009 at 8:00 pm

3. Why don’t more companies make jumbo jets?

The jumbo jet market is not characterized as a perfectly competitive market. This is important because this means that there are significant obstales preventing 'just any' firm from entering and exiting the industry. The short run costs would, in most cases in a jumbo jet market, overcome the profits and the firm would be forced to discontinue. Jumbo jets specifically have an naturally high total resource cost, meaning that without underlying advantages such as materials deals, entering the market would be an unwise economic decision for most entrepeneurs.

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12. Thomason 30 Nov 2009 at 2:27 am

1. Why don’t more companies make jumbo jets?

- There are so few companies that make jumbo jets because there are significant barriers for entry into the aircraft market. Jumbo jets are incredibly expensive to design build and run, the amount of fuel that they use for one flight is around 10,000 pounds per hour so to start the company you will have to have a lot of money. Also since plane travel is considered a risky venture there is a certain amount of brand loyalty that controls the market.

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13. Graham N.on 23 Nov 2010 at 1:12 am

1. A company is "too big for its own good" when the very size of the company makes it unwieldy; it might be too difficult to control and keep track of all of the smaller units within the corporation, or governments may try to regulate it to encourage competition.

2. In some industries, the capital needed for regular operation is so prohibitively expensive that the marginal cost for a second company to set up power, water, or telecommunication lines is not worth the minimal amount of revenue that they might make. These costs become a smaller fraction of revenue the larger that a firm is, leading to "natural monopolies".

3. More companies don't make jumbo jets because the capital needed to begin production is scarce and therefore expensive in the free market. A company would need a large number of aerospace engineers, specialized manufacturing plants to produce each component of the plane, and large amounts of financial capital to develop even one plane. Another producer would increase competition in the jumbo jet market, and drive revenues down for all of the companies involved, including the firm entering the market. The chance of making a large profit on the massive initial investment is just too small to be worth the risk.

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14. Pilar M.on 23 Nov 2010 at 3:41 am

1. When a firm becomes "too big for its own good" it experiences economies of scale. If a firm gets just too big, communication gets worse. Imagine having a hundred managers compared to just three. Hence, the lack and difficulty of communication can become a problem for the firm and sometimes even lead to a failure.

2. Utility industries are not so competitive because the opportunity cost of another firm wanting to establish e.g a garbage collection firm is too high. For this sort of monopoly industry of natural resources like water, natural gas, etc., the difficulty of achieving lower average costs in the long-run is very difficult for a new firm. The barriers to entry are hence also very high.

3. More companies do not make jumbo jets because the explicit cost, like the whole capital, are just too high in order for the firm to achieve its normal profit. If a firm wants to go into the market of jumbo jets, it has to have a large amount of capital, land, and labor. Thus, an entrepreneur has to take into account the high explicit cost (like capital) and the high implicit costs (entrepreneur's opportunity cost, loss of interest). Hence, this market is very risky and so not a lot of firms produce jumbo jets. The fixed costs do just seem insurmountable.

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15. Anuon 23 Nov 2010 at 6:04 am

1. If a company is "too big for its own good" this simply means that the company has diseconomies of scale. This means it is highly inefficient and has high average total costs. The Roman empire became "too big for its own good", suffering from corruption and inefficiencies at its maximum size, eventually leading to the collapse of the empire.

2. My hometown has only one electricity company because the utility industry has high barriers to entry – in the form of government regulation and high capital costs. Natural monopolies like this exist because foremost the government regulates the utilities companies to operate at economies of scale or constant returns to scale. Additional firms in the industry would require a long time to acquire the capital needed for a utilities firm, and even then multiple pipelines and electricity grids would be inefficient for the country as the utilities industry would become 'too big for its own good'.

3. More firms do not make jumbo jets primarily because jumbo jets require highly specialized labor and capital, resulting in high barriers to entry in the jumbo jet industry. New jumbo jet manufacturers would have to acquire large amounts of capital and land to set up 'shop' which is only possible in the long run. However, as the planes can be only manufactured in the long run too, the new company will face very high average total costs and low revenues initially, and will lose the incentive to stay in the industry.

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16. Jakeb Stunzon 23 Nov 2010 at 9:20 pm

"What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?"

As a company grows so big, the management within the business can go corrupt quite easily due to lack of control. This lack of control can lead to increasing inefficiencies in the business and less effective ways of using Economies of Scale.

The first company that comes to mind that had a large deficit period is Starbucks. Starbucks, making good revenue, decided to expand but ended up over-expanding at such a fast rate that they became "too big for their own good." Starbucks hit a low point and shut down a good number of their cafes world-wide.

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17. Bai Hangon 23 Nov 2010 at 9:47 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

This situation occurs when a firm or business becomes too big, it begins to experience inefficiencies. If the size of a firm grows very large that it has factories in all around the world, then it will requires a dozen levels of management, and countless opportunities for corruption and miscommunication, its efficiency decreases and its average total costs begin to increase. Ford car company is such one example, in 1908-1924, Ford's big size benefits its business a lot, because of the uses of economies of scale, the company reduced its average costs and its sales improved a lot. In order to enjoy the benefits of big size, Ford do not service its customers with the variety of cars, thus, its products become less competitive compare to Japanese motor company.

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18. Christophon 24 Nov 2010 at 1:56 am

If a company is “too big for its own good”, it has become too large. Total output will decrease, as resources are not used efficiently and the firm can't control its production. The firm's management is no longer able to control every section of the company, and its average costs of production will increase again. The firm is now a diseconomy of scale.

The electricity business is monopolistic, because the entry barriers are too high for other companies to enter. The capital a competitor must acquire in order to compete with the current provider is too expensive and it would take ages for the company to make profits from their business. In addition, my hometown is too small for two companies to operate at the same time.

Again, the capital required to produce jumbo jets is enormous. Entrepreneurs need billions of dollars to overcome the barriers of entry and get started in the jet business. Companies that have been involved in the jumbo jet business for a long time have specialized on the production and are able to produce the planes at a price cheaper than the equilibrium price. A new firm will face high costs of production and will not be able to sell their products below the equilibrium price, therefore making a loss.

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19. Asuka Shirakion 24 Nov 2010 at 8:06 pm

The phrase ‘a firm can become too big for its own good’ refers to diseconomies of scale. Since this is the last phase of a firm’s long-run average total cost, it implies that the firm has expanded to an extent that their average total cost start to increase because firms are too large that they are unable to control all the different aspects of the business. Therefore inefficiency increases and average total costs increase.

For example, ExxonMobil and Chevron Texaco are one of the major oil companies that have reached the diseconomies of scale phase, where they are struggling to find enough new reserves to replace those used each year.

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20. Alain Meyeron 25 Nov 2010 at 2:41 am

1. A firm becomes too big for its own good once it becomes too difficult to manage itself. For example, Microsoft is often criticized for being too big for its own good, as there is a lot of inefficiency given the number of programmers they have. In addition, government intervention can lead to more inefficiencies.

2. In the particular case of utilities, having competition would lead to inefficiency. They are government regulated, and so power lines for example would require different power lines unless they worked together somehow. As the single company grows bigger, it makes the average costs lower, and for a nation-wide company, if one company controls the power then the overall wealth is higher than if there were competition.

3. When an industry has high economies of scale, then that also means that the barriers to entry are very high. The company that creates 10 airplanes per year will have far higher operating costs than the company that creates 1000. The people who can make 10 will then be forced out of the market because they can't sell the airplane for as cheap as the company "mass" producing them. The amount of capital and skilled workers is tremendous, and most people can't even begin to raise enough money to buy the materials.

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21. Uday Srinivasanon 25 Nov 2010 at 4:07 am

1.

When a firm is too big, it faces diseconomies of scale. This means it is so large that it is difficult to sustain due to problems such as limited communication. This concept was apparent in the fall of the Roman Empire. The empire grew to such a vast size that it became increasingly inefficient and difficult to control.

2.

For some industries such as railways or electricity providers, it is extremely inefficient for separate firms to compete. Having multiple sets of railway tracks or power lines would be completely unnecessary and expensive. A town only needs 1 set of power lines. Only 1 firm selling goods that are both in vast demand (needing more than 1 firm to handle) and inexpensive to produce (e.g. brownies) cannot match the demand. However, there is only demand for 1 set of power lines which can be kept for a long time. These utility industries naturally create monopolies because it is not worth anyone's while to compete.

3.

The resources required to produce jumbo jets are very expensive and the actual manufacturing of each jumbo jet takes a very long time. After a few old, well-established firms reach MES after having time to expand, it is very difficult for any new firms to compete because they, at their beginning, will be a lot further left than the old companies and have much higher average long term costs. Therefore, they cannot compete with firms such as Boeing that have a much lower average cost per passenger.

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22. Jad Z.on 25 Nov 2010 at 4:16 am

1. When a firm has become too big, it means the firm has trouble managing its self. An extremely long chain of managers reporting to the CEO can make information slow and warped. This happened to GM in the recant years, where the US government had to bail them out. And there are fears it will happen to Toyota and other Japanese car manufacturers.

2. New competitors of the utilities business are not able to enter the market because the barriers to entry are too high. These already established companies have been around for a long time and therefore already experienced economies of scale whereas the new ones will still be on the top of the Average total curve; These smaller companies will not have the luxuries the larger companies have such as buying in bulk. They wouldn't be able to compete with the already set prices therefore no one will use their services.

3. More companies do not build Jumbo jets because, like above, the barriers to entry in that market are too high. Boeing and Airbus have the experience and the capital needed to set the price that jumbo jets have today. Therefore they have experienced economies of scale, and this can only happen in the long run. A new company will have not experienced economies of scale because of their short term presence. Because they do not receive the same amount of power as Boeing and Airbus, such as a large influence in the prices in the resource market, the new firms will have a high average cost and therefore their price per unit would be extremely large.

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23. Younho Junon 25 Nov 2010 at 9:54 am

“What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?”

The firm become "too big for its own good" means that the business grow too big that it is hard to manage effectively. Therefore, it leads to the inefficiencies of firm and increases its cost. By expanding in such a large size, it will require better control and management. Due to increasing misallocation and inefficiency of resources, it will increase the cost for firms due to its massive management scale.

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24. Richard Tantyo Putraon 25 Nov 2010 at 12:03 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

It means that the firms is growing too fast and therefore, lack of control and management occurs. This situation will lead to the inefficiency in the business since the company will not get benefit from the economy of scale and the average cost of the firm increase.

One of the examples is AIG (american international group). AIG has reached the diseconomies of scale phase since the recession occurs in the economy.

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25. Joeon 25 Nov 2010 at 11:17 pm

1. A firm being too big for its own good means that it is experiencing dis-economies of scale, meaning that its running at high inefficiencies, for example it may have too many factories open and not enough resources like material or labor in order to produce enough to balance out their average costs.

2.The utilities market is mostly a monopoly due to the large barriers to entry, any new firm attempting to get into this Market would need to have large amounts of capital to start with( which the current utilities provider will already have and would have gained over time) which would be very difficult to get as a new company,and even if you were to achieve the necessary amount of capital, the average costs would be too great for you to make a large enough profit, if any. The concept of economies of scale shows that when a company, for example a utility company, becomes established and has all the capital necessary like infrastructure, then they start to take up the majority of the market and anyone coming in would not have a chance because it would not be possible for them to achieve economies of scale.

3. This is generally the reason why more companies don't just try to produce jumbo jets because a company that produces jets takes huge amounts of time and capital, that it would not be possible for them to achieve economies of scale in order enough to make enough profit to cover their explicit costs.

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26. Markel Z.on 26 Nov 2010 at 6:04 am

1. When a firm becomes "too big for its own good", it means that its average total costs have started to increase and the firm is now experiencing inefficiencies due to miscommunication between levels of management and possible corruption within the firm. The only way to decrease average total costs one a firm has become too big is to either split up into several smaller firms in order to stay competitive, or shut down plants and fire workers in order to increase efficiency within the firm again. Microsoft is a good example of an organization that has gotten too big for its own good. Due to its large size, Microsoft is being accused of monopolistic behavior and its average total costs have risen due to miscommunication and lawsuits against the firm.

2. Utility industries such as water, natural gas, and garbage collection are monopolistic and are regulated by local governments. The reason for the low level of competitiveness is that it would be extremely expensive and unnecessary to join markets for these utilities people are not demanding more and the barriers of entry are so high. Utility firms have been in the business for a long time and are now able to attain needed capital for cheap prices because of 'bulk' imports which have a dramatic effect on their average total costs, making them very low. A new firm wishing to enter these industries would not have the benefits of attaining capital for such cheap prices and would therefore have a very high average total cost. Utility industries have experienced economies of scale and are therefore "natural monopolies" with low average total costs due to skill and discounts for the capital they need.

3. Joining the jumbo jet industry is very difficult because of the high barriers to entry. Firms that have been specializing in the creation and improvement of jumbo jets have achieved the minimum efficient scale in the long run, meaning that they are working efficiently with the lowest average total cost attainable. This means that old and well established firms such as Boeing are able to obtain resources much more cheaply than 'new' firms wishing to enter this industry because Boeing has experienced economies of scale and is able to make bulk purchases for needed capital while a new firm must pay very high prices since it does not yet have the same benefits as a firm such as Boeing that has experienced economies of scale.

is able to get more output per unit of input

s its minimum efficient scale: The level of total output this firm must achieve to minimize its long-run average total cost.

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27. Cedric Uribeon 26 Nov 2010 at 7:30 am

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

When a firm becomes "too big for its own good", it means that the firms ATC has started to increase and that firm has started to see miscommunication and corruption within their management. Due to this, their ATC starts to increase as they are no longer efficient enough to produce a larger quantity of outcome which then leads to an increase in ATC. An example of an organization that has gotten so big that they've failed is Swissair. In 2001, Swissair eventually went bankrupt as the airline invested too much into new capital such as airplanes. Eventually, their ATC outweighed their demand for flights which led them to file for bankruptcy in mid 2001. The main cause of this was a miscommunication between the board of executives, the government and Swiss Banks.

Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

My hometown only has one electricity company because since its in a monopolistic market, there are high barriers of entry and capital costs would exceed the revenue of new firms joining this market. Utility industries such as water, natural gas and garbage collection aren't more competitive because they are monopolistic and regulated by the government. The barriers of entry for new firms in this market would be very high and as I mentioned before, their ATC would exceed their revenue meaning that coming into a Utility market would not be a good idea. A firm, who has already been in this market for a while would benefit from low ATC as they order in "bulks" or large quantities. A new firm wishing to enter the utility industry would find it very hard to compete with the firm that has already been in the market for a while. Economies of scale lead to certain industries being natural monopolies because due to low tariffs and costs, they are able to maintain their low ATC while it would be different for a firm wishing to join this industry therefore, not joining creating " natural monopolies."

Why don’t more companies make jumbo jets?

More companies don't make jumbo jets because the barriers of entry are quite high as large amounts of capital and time is required to make jumbo jets. As a firm such as Airbus or Boeing begins to see economies of scale, it would be very hard for another firm to enter this market as intensive labor, capital and funds are required. With a major producer such as Boeing producing large quantities of airplanes yearly, a new firm wishing to create jumbo jets would soon run out of business as it would not be able to acquire enough capital in producing Jumbo Jets as it is a Veblen good meaning that factors of demand come in to question such as the amount of consumers being airlines, their income or their fiscal profits which would be acquired to purchase new inventory. China's airplane manufacturer Comac, which recently joined the monopolistic market, will be facing difficulties in competing with bigger firms such as Airbus, Boeing or Embraer.

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28. Francesca Perversion 26 Nov 2010 at 10:05 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed? When a firm becomes too big for its own good, it means that the firm is experiencing diseconomies of scale, ATC is rising and workers in the newly opened plant, for example, are becoming less efficient. One of the possible causes for this might be the company’s inability to manage the firm in its allocation of resources – for example labor not utilizing capital efficiently. The Roman Empire became “too big for its own good”, suffering from corruption and inefficiencies at its maximum size, eventually leading to the collapse of the empire.

2. Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

The electricity business in my hometown is monopolistic, because the entry barriers are too high for other companies to enter. Additional firms in the industry would require a long time to acquire the capital needed for a utilities firm, and even then multiple pipelines and electricity grids would be inefficient for the country as the utilities industry would become ‘too big for its own good’. Another reason is that my hometown is too small to have more than one electricity business, unlike in big countries.

3. Why don’t more companies make jumbo jets?

Jumbo jets specifically have an naturally high total resource cost, meaning that without underlying advantages such as materials deals, entering the market would be an unwise economic decision for most entrepreneurs. More firms do not make jumbo jets because they require highly specialized labor and capital, resulting in high barriers to entry in the jumbo jet industry.

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29. Nicole_Sonderegger_Non 27 Nov 2010 at 6:01 am

1. When a company becomes too big, it often begins to experience many inefficiencies, meaning that it suffers from diseconomies of scale. There are too many sectors to control and too many people in charge. Very large firms have many levels of management and so many opportunities for corruption and miscommunications. General Motors is an example of a company that got too big for its own good. It did not go completely bankrupt, but it did get close as it diversified into too many fields and was unable to produce sufficient output in each area.

2. There is only one electricity company because the first supplier in the market has a large cost advantage over potential competitors. Capital costs predominate in utility industries, which create economies of scale. It is very expensive to build transmission networks. This makes it so that competitors are unlikely to want to enter the market, and so these industries naturally remain as monopolies.

3. It is very expensive to make jumbo jets. Few companies make these because it is very difficult to start producing these. The fixed costs are extremely high and so it is very hard to pay these, especially at the beginning when the company can only produce a few jets. This means that the company will have to sell the jets at very high prices at which there is very little demand.

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30. Bryan_DiLauraon 29 Nov 2010 at 12:05 pm

1. A firm can become "too big for it's own good" when the negative effects of being larger, outweigh the positive effects. This is kind of similar to the law of diminishing returns. It can be good to a certain point, but once that point is reached, it becomes more of a hindrance than a benefit. A real life example I can think of is Alexander the Great's empire. There came a point where he couldn't keep control over all of his people/land, and he ended up losing it all (yea it was after his death, but still. The fight of the large empire is what killed it).

2. Utilities normally have such a monopoly over a certain area, it is nearly impossible to enter the market. The up front cost of putting in all of the infrastructure and getting new customers is way more than most entrepreneurs are willing to put up. I also believe that there are many government regulations on utilities that make it even harder still.

3. Making jumbo jets is very expensive. The fixed costs are so high that it is very hard to get into the market. Also the market for jumbo jets is relatively small because there is a low demand for them. The combination of it hard to start up, and the smaller market, make entering the jumbo jet industry a more unattractive move than entering another market.

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31. Bryan_DiLauraon 29 Nov 2010 at 12:08 pm

(@Markel Z.) I really liked your use of the Microsoft company for an example in number 1. I completely agree with the fact that they have gotten too big for their own good.

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32. Huanni_Wuon 29 Nov 2010 at 6:49 pm

1.It means a firm can become really large so that the diseconomies of scale start to outweigh the economies of scale in the long run. One example I’ve thought of is the fall of the Western Roman Empire.

2.To set up an electricity company requires a huge amount of capital for building power stations and establishing transmission lines. Only fully reinforced companies can afford those expenditures and if there were many electricity companies, the power supply system would muddle up. Therefore, only one (strongest) electricity company could finally gain the opportunity of providing electricity for a city. It is the same with other utility industries. The concept of economies of scale indicates that as the size of an industry grows, it becomes feasible to have its own large machines and develop its own technology so as to reduce its unit costs of production. As the time goes on, these industries become larger and larger and begin to have a fixed amount of customers. These make other entries become even harder and lead to utility industries being “natural monopolies”.

3.A large amount of machines and a certain level of technology are required for making jumbo jets. These have set a high threshold for new entrants. And because of economies of scale, companies which are already making jumbo jets can gain more and more power due to advanced technologies, their own transportation systems etc, as time goes on. Other companies would rather make normal products than complete with such a superpower company.

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33. Huanni_Wuon 29 Nov 2010 at 9:12 pm

(@Nicole.S) I like your answer to the third quesiton. It's good to mention fixed cost and use demand to explain why there are few companies making jumbo jets.

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34. Nicole_Sonderegger_Non 29 Nov 2010 at 11:09 pm

(@Felipe R Lopez). I like the way you explained how the Roman Empire grew so large that it was forced to split into two in order to try and control it, and yet, the empire still collapsed. The same thing often happens with firms who try to divide into separate sectors because they have become too large, but continue to be inefficient.

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35. Behiye Ilkayon 30 Nov 2010 at 3:32 am

1) It means that the firms is not efficient and adequate, because it may have some problems with communication (lack or poor communication), slow decisions (as the firm is big, it may take longer time to make a decision), and growth in bureaucracy (excess of work). In this issue, we can give Ottoman Empire, which ruled very large land many years. However, some problems caused it to have a great decline and to fall.

2) It is really hard to enter the market because it has the technical power. Also, if the firms is big, it is easier to deal in purchasing and receive some tolerance in financial issues from the bank. So the power is with firm whose scale is big. That is why economies of scale is really significant for natural monopolies.

3) Jumbo jets obviously require great deal of land, capital, and labor. That is why the technique would be very drastic in the market so it would cause to be harder to enter the market.

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36. Behiye Ilkayon 30 Nov 2010 at 3:43 am

(@Alain Meyer) I liked the example you gave for the first answer and I agree that sometimes the government inhibits the efficiency in a market.

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37. Asucan Odç?k?on 30 Nov 2010 at 4:40 am

1) When a company becomes “too big for its own good” it means that the company is now insufficient which lead us to think the reasons of diseconomies of scale. These reasons are poor communication, lack of motivation, difficulty of making useful decisions and loss of direction and coordination of workers due to the large size. I think one of the best examples for this situation is the Ottoman Empire. Ottoman Empire was also a very big and powerful empire and it was getting even bigger and bigger. But due to the effects of diseconomies of scale they had some troubles to control their lands and their people. Because their lands were too big to operate for their own good. So it also affected the economy as they couldn’t make useful decisions. Because of that reasons they collapsed even they were a big empire.

2) Building a new electricity company will cost a lot of money to its entrepreneur as they should build new power stations, and transmission lines. And the first supplier of the electricity has already these facilities so to enter this business is very risky and not profitable for another company as it costs too much than what it brings. Moreover, all of the utility industries are monopolistic so that they have high barriers for other companies to enter these industries. Also I think as it is only one company for electricity it gets bigger and bigger so that they developed their facilities and technologies that they use which means reducing cost and increasing output. So that the economies of scale occurs here as it is only company in the town.

3) In order to make jumbo jets a company should be at a certain level. This company should have a developed technology, enough land and capital and at the same time enough labor. And moreover there are companies which are already making jumbo jets and having these requirements due to economies of scale. So to enter this market and make jumbo jets for another company is very hard and unrealistic because of the high level of requirements.

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38. Asucan Odcikinon 30 Nov 2010 at 4:46 am

(@Nicole_Sonderegger_Norris) I really liked your example for the first question. The General Motor became really big in size for a company but as you also mentioned it did not bankrupt completely but it seperated itself a lof smaller companies to operate the brand easily and successfully. And also for the third question to mention about high fixed costs is a very good way to explain why companies are not making jumbo jets.

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39. Francisco_Jose_Carilon 30 Nov 2010 at 10:08 am

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

The fact that a firm gets to big for its won good, means that it reached the point in which it simply cannot control itself. This can happen because of many reasons, such as: the need of a large group of people only to manage corporate decisions, miscommunication thanks to cultural and language barriers, inefficiency, and bureaucracy.

Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

I live in Costa Rica and the electricity market is governed by the ICE. It techicaly owns all the power grids and cell phone lines. But it is private company controlled by the government. Thanks to this we have one of the lowest prices for electricity and phone services in Central America. It is only one company because it will be innefective to have more, if we had more then then there will not be enough demand for both and they will have to become smaller. If this happens then there could be barriers between users from one company and the users of the other. The same thing happens with other services fro the same reason, there may be 1 or 2 but not that much more. In a way this is a natural monopoly.

Why don’t more companies make jumbo jets?

Basically because there are only 2 big-world-dominating companies: Boeing and Airbus. There are more, but they are not nearly as big. One of them already made and makes 747 (Boeing), if both made them then it will be very much more difficult to sell them. Also, Airbus, instead of making them, makes another type of plane thus increasing its profits. We see this today but the sides are reversed Aribus is making the big plane A380 while Boeing is making the small plane 777.

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40. Francisco_Jose_Carilon 30 Nov 2010 at 10:16 am

Response to Jakeb Stunz

I didnt know that fact about Strabucks, I have always wandered why, here in Costa Rica (where coffee is one of our main cultural traits) we dont have Starbucks. Now I understand that it will actually be very difficult for it to come and establish here, since most of us like to make our own coffee.

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41. Daniella Majlufon 30 Nov 2010 at 11:10 pm

That a firm becomes “too big for its own good” means that the bigger a firm gets, at the beginning it might bring many advantages, but there may come a point in which the firm gets way too big, that the advantages that it had, no longer exist. Like this article says, “When an organization becomes too big, it begins to experience inefficiencies.” Examples of firms that became too big for their own good are past empires that thought that by getting bigger and bigger would obtain more power and ultimately become the best empires. But there came a point in which these empires got way too big and lost power. Some of these empires split and others simply fell.

My hometown has only one electricity company because the cost of production is very high and the demand is more or less the same over an immediate time. These companies also have to comply with very strict laws and regulations that 9in order to serve their purpose, consequently act as barriers for new competitors in this market. In Costa Rica it is a monopoly because the law only lets the government run these industries. Economies of scale lead this and other countries to natural monopolies because they grow to such a large size that only they can give a competitive price for the consumer.

More companies won’t make jumbo jets because they are very expensive and require a lot of specialization.

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42. Daniella Majlufon 30 Nov 2010 at 11:15 pm

Response to Francisco_Jose_Carrillo_Fernandez:

It is very true about ICE being a very big electricity company that works for almost every country in Latin America, so it would be very difficult for another electricity company to compete against ICE since it is already a very famous and big company.

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43. Mehmet_Mert_Sumaon 30 Nov 2010 at 11:32 pm

1.When a firm becomes too big, it becomes too hard to control it. Poor communication, slow decision making and growth of bureaucracy make it difficult to run the firm successfully. For instance, big firms owned by families may choose to break down the firm because some family members may want to get the power in the firm. A conflict over authority can start. The firm may be affected badly by the authority problems.

2. Some markets are very hard to enter. Capital, land and labour may be hard to access. For instance, a town's electricity system is a unique place. Only one firm may use it. This is because of lack of land. On the other hand, water market is totally different. There are many water reserves to use. Small firms can use this reserves and a more competitive market is formed. in the electricity example, specialized labour, high-tech machines and lack of land makes a natural monopolistic market.

3. The cost of production is really high to produce jumbo jets. High-tech machines, very specialized labour and a good production site(runways needed to test the product). There are really high barriers to enter the market.

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44. Mehmet_Mert_Sumaon 30 Nov 2010 at 11:41 pm

Response to Francesca Perversi:

It is nice to show the Roman Empire as an example because we know that the Roman Empire split into two before its fall. It shows how much difficult was to control a big empire.

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45. Ozge_Elif_Ozeron 01 Dec 2010 at 4:15 am

1- When a firm is ''too big for its own'', it means that the firms is facing with diseconomies scales. There are some disadvantages of having bigger firms. For instance, loss of control and motivation. In the history, we can see that empires got closest to their end, when they were living their greatest time, because great sizes means diffuculty of controlling citizens, and keeping peace.

2-Building an electricity company and building a water company is so much different from each other, because to build an electiricity company, things needed such as capital and labour who is knowledgable about the cables and this kind of things is much more harder than to find people to work in a water company.

3- Companies do not choose to make jumbo jets, because the cost of production is very high and labour should be knowledable about the technologic machines.

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46. Ozge_Elif_Ozeron 01 Dec 2010 at 4:20 am

Response to Mert

I think this family company is different from all the examples of empires. It is true that in family cooperations there could be some problems between family members and that sometimes causes a lot of problems to the firm.

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47. Talia_Greeneon 01 Dec 2010 at 10:21 am

1. A firm becomes “too big for its own good,” when it becomes so large it is inefficient and enters the range of the long-run ATC curve that involves the diseconomies of scale. An example of this was the Roman Empire, which became too large to govern and eventually collapsed.

2. Utility companies tend to have a monopoly over an area because there are many barriers to entering this industry. There are a lot of systems that have to be set up, such as electricity wires and water pipes, which make the costs very high and prevent a lot of competition in this industry.

3. So few companies make jumbo jets because of the many barriers to entering this industry. The costs for the industry are very high due to the many and expensive materials and complex designs and systems involved. This prevents many new entrepreneurs from entering the industry.

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48. Talia_Greeneon 01 Dec 2010 at 10:21 am

Response to Ozge:

I like how you included the specialization of knowledge in your response to number 3. I had mainly just thought about the more concrete expenses of the materials, but this is a very important expense as people with adequate knowledge of the designs are hard to find. It could be applied to many industries.

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49. tomoya_sekineon 01 Dec 2010 at 10:51 am

1. A company or a firm becomes “too big for its own good” happens when a company/firm becomes too big that it begins to experience inefficiencies. For example, if a firm expands their business worldwide to all different areas, they would need to take a lot of care for management, employees and often there would be miscommunication within the different areas of the firm (could be due to language wise or just the lack of communication). The result of the inefficiency leads to the firm’s average total cost (ATC) increasing. Usually in the world of business, big companies are successful but an example of a collapse of a big organization would be empires in the past. If an empire becomes too big in size, there would definitely be conspirators within the organization that would want to overthrow the leader. Or simply there would be a lack of communication due to the large size of the empire.

2. My hometown only has one electricity company due to the fact that the capital is very high to start a public sector business like providing electricity to a town. As well as the fact that it would be very hard for a business to increase in size and or growth in the business. When industries benefit a lot from the economies of scale, they are in the state of natural monopoly as the industry is providing the majority of their goods/services to the consumers.

3. Companies do not make a lot of jumbo jets simply because of the fact that the initial capital to start a business of jumbo jets is very high. On top of that, they would need specialists in the specific areas such as skilled engineers and such. Because of this the company wouldn’t make a lot of profit, due to the very high cost of production.

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50. tomoya_sekineon 01 Dec 2010 at 10:59 am

Response to: Cedric Uribe

Your example for the first question is very good and understandable. It clearly shows the concept of economies and diseconomies of scale and how a large company could become successful at first and do well but in the end, they invested into new things which led to their business collapsing.

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51. Juan_Manuel_Arguedason 01 Dec 2010 at 12:07 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

What "too big for its own good" means is that when a company is just very big and it gets to the point that it gets out of control. This means that since the firm is very big, there would be hard communication or no communication at all inside the company. An example of it would be all the empires that have existed in the past. It gets a point when you can't control every person, so it would eventually fail.

2. Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

My hometown has only one electricity company due to the fact that the costs are low. In my country for example, there is just one, for the whole country. It is very hard for this company to have an excellent servide, there are always complains, and it collapse regularly. The fact that there is only one company makes the whole country depend on it, so its costs have to get the price lower. Utility companies are not more competitive due to the fact that they are resources that people need.

3. Why don’t more companies make jumbo jets?

First of all, a jet is expensive. Then, a jumbo jet, would be twice or even more times more its price! I don't think the companies are interested in it, now that they would be making them right away! Then, the price, is just too high to start making lots of them.

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52. tiffany_williamon 01 Dec 2010 at 12:37 pm

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

Why don’t more companies make jumbo jets?

1) It means that when a firm increase its size into a very large one, it may benefit them in many ways in the beginning. However, disadvantages will start to occur after sometime. Such as, owner will start to have difficulties communicating or controlling over the employees as the firm has become to big to be handle. With the increase of output, the firm may lose its efficiency and cost begins to rise.

Example may be the empire story we had before. As the empire begins to grow larger and larger, the emperor is not able to handle the large size of empire and there may be possibilities for the empire to collapse due to poor management.

To set up an electricity company is very expensive indeed. There will be a need of large amount of capital to build one.It's a natural monopolies as each industry doesn't now have much competitors or there may be no competitors too. That's why they are not competitive as well.

The cost and capital to make more jumbo jets needs a very high cost and many firms avoid taking this risk. The need of skilled labour or workers are as well needed. It will take time to find such skilled workers, and not only that. The cost for such workers are usually high as well.

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53. tiffany_williamon 01 Dec 2010 at 12:38 pm

1) It means that when a firm increase its size into a very large one, it may benefit them in many ways in the beginning. However, disadvantages will start to occur after sometime. Such as, owner will start to have difficulties communicating or controlling over the employees as the firm has become to big to be handle. With the increase of output, the firm may lose its efficiency and cost begins to rise.

Example may be the empire story we had before. As the empire begins to grow larger and larger, the emperor is not able to handle the large size of empire and there may be possibilities for the empire to collapse due to poor management.

To set up an electricity company is very expensive indeed. There will be a need of large amount of capital to build one.It's a natural monopolies as each industry doesn't now have much competitors or there may be no competitors too. That's why they are not competitive as well.

The cost and capital to make more jumbo jets needs a very high cost and many firms avoid taking this risk. The need of skilled labour or workers are as well needed. It will take time to find such skilled workers, and not only that. The cost for such workers are usually high as well.

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54. tiffany_williamon 01 Dec 2010 at 12:41 pm

@# Huanni_Wu

it's a very cute and good response of your 3rd question.

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55. Juan_Manuel_Arguedason 01 Dec 2010 at 12:58 pm

@Bryan_DiLaura

I think that your connection between the law of diminishing returns and the "two big for its own good". It makes a lot of sense.

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56. Dogan_Can_Ozcanon 02 Dec 2010 at 1:12 am

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

- It means a firm can be very large and can have more benefit than the other firms. But being a big firm can have many disadvantages. For example the owner of the firm can't control the workers and he/she can't handle all the works. After a while the output of the firm will increase day by day.So the firm will be bankrupt. I think an example to this is the empires in the history. I want to give the example from our history. Ottoman Empire enlarged its borders in a short time and after a while the sultan couldn't communicate with the other governors. After a while Ottoman Empire started to lose most of its lands.

Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

-I think the most important reason is that building an electricity company is very expensive. If there were more electricity companies the money that people pay would be more.While building an electricity firm high-tech machines are required .Also lack of land makes it natural monopolistic market.

Why don’t more companies make jumbo jets?

-Most of the companies don't make jumbo jets because cost of production is really high and it can damage the economy of the company. To make jumbo jets the firm should have necessary requirements.

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57. Dogan_Can_Ozcanon 02 Dec 2010 at 1:18 am

Response to tiffany_william

The connection between big companies and the history of empires is really good. I think most of the people gave the same example to first question

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58. Andres_Finol_Rodriguon 02 Dec 2010 at 10:40 am

What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

This is similar to the expression “too much of anything is bad for you.” When a firm is too big, it is hard to manage and begin to become inefficient. Being too big gives way to possibilities of corruption and miscommunications creates more inefficiencies and eventually this will cause the average total cost to increase.

Some examples of things that have gotten so big that they’ve failed are: humans that are so tall they begin to have medical complications, the British empire as they could not control all their territories, and Microsoft as it has such a diverse consumer base and such different products that they do no have good customer support or a concentrated unit for a certain good.

Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

It is because these companies have to be very efficient to work with these utilities. If there were various small companies, according to economies of scale, the cost would be very high, and this they would be charging the consumers a high price for these utilities.

Why don’t more companies make jumbo jets?

Jumbo jets are a product that would require a huge cost. To make a jumbo jet, millions of dollars are spent, and in order to decrease this, the company would have to grow, however, if there were more companies making jumbo jets, eventually the need would be satisfied and the costs would still be incredibly large.

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59. Andres_Finol_Rodriguon 02 Dec 2010 at 10:48 am

@Juan_Manuel_Arguedas_Rodriguez

I see your point of only having on type of power company as the prices will be low since they will probably have a low ATC, however if it gets too big it, there should be another company to step in.

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60. Susanne Robertsonon 03 Dec 2010 at 6:04 am

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

When a firm has become "too big for its own good" it is experiencing diseconomies of scale. This means that when a firm grows beyond the optimum size, the average costs of the firm will rise. This was the case with Bearing Point. The firm became too large for efficient management to control the firm and had an estimated 1 billion dollar in depts. As a result, in May 2009, BearingPoint's Japan unit was sold to PricewaterhouseCoopers.

2. Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

Electricity as well as water, natural gas and garbage collection industries are mostly monopolistic. It would be easier for one firm to dominate the market for necessities because it would benefit from factors such as reduced average costs, having a larger share in the market and buying materials in bulk. If utility industries were more competitive and had more than one firm in the market, it would lead to higher prices for the consumer as these factors mentioned before would be canceled out.

3. Why don’t more companies make jumbo jets?

Jumbo jets are highly labour, capital and land intensive products. As a result, they can only be produced in the long run. Initially, it will be difficult for jumbo jet producers to enter the market as the barriers of entry are high and it will take time to produce jumbo jets up to standards of the consumer. The average total cost of the firm in the short run will be high and result in little profit, therefore many companies do not make jumbo jets as it has little benefit to them.

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61. Christian Camarilloon 03 Dec 2010 at 4:22 pm

1. A firm can become too big when there is miscommunication, non-agreements between executives, too many locations world wide, etc. This is known as diseconomics of scale. For example, the British Empire was so big at one point that it had land in each and every time zone around the world. This led to diseconomics of scale and it eventually collapsed from its own success.

2. Water, gas, and electricity companies are all monopolies, that is why there is only one per town. A monopoly has no competition; they are the only ones in that specific market. Economic of scale is applied to these monopolies because the companies have low production costs since there is no competition

3. Barrier of entry is the reason why there aren’t many producers of jumbo jets. In order for you to even consider going into this type of market, you need to have a ridiculous amount of money which still isn’t everything. You need to compete against the few other companies which will destroy your company anyways.

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62. Christian Camarilloon 03 Dec 2010 at 4:24 pm

that is very interesting Francisco, I thought that Starbucks would be sold world-wide but I guess not. It was a smart move foe them not to have business in your country because they wouldn’t get any business.

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63. Philippaon 03 Dec 2010 at 6:58 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

A firm can become too big when having too many factories causes problems, experiencing diseconomies of scale. The additional factories cause inefficiency and rising average total costs. An increase in the amount of capital and land leads to an increase in costs. This could be due to inefficiencies in communication. A day to day example of this could be within a group of people trying to organize a birthday party. If there are too many people, there may be ambiguities about who is doing what. Everyone may think that someone else is bringing the cake or individuals believe they were allocated the cake-bringing job, so in the end no one brings the cake, or more than one cake is brought!

2. Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

It wouldn’t be very effective to have two electricity companies in one town because they would obtain their electricity from the same plant. This would cost the same and therefore the two companies would have the same prices. Only one company is needed.

3. Why don’t more companies make jumbo jets?

The companies that make jumbo jets at the moment have taken a long time to get where they are now. They probably started as smaller companies making smaller jets. That company already has deals with the suppliers which would make it more difficult for other companies to try and compete with the original company for lower costs and therefore lower prices. All the specialized labour is also taken up by the original company e.g. engineers. Another company would have to offer the engineers a higher salary in order to bring them to their own company. All this would result in the newer company facing very high costs which would lead to low profits and therefore it would have to close down.

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64. Gökçe G&on 04 Dec 2010 at 3:18 am

• What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

Basically;if a company is “too big for its own good” means that the company has diseconomies of scale.As the company grows so big, the management becames hard and it can go corrupt quite easily due to lack of control. It is hard to control every single worker. This lack of control can lead to increasing inefficiencies. The first company which comes to my mind is McDonald’s which decided to expand but ended up over-expanding at such a fast rate that they became “too big for their own good.” Starbucks hit a low point and shut down a good number of their cafes world-wide.

• Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

In the special case of utilities, having competition would lead to inefficiency. They are government regulated. As the single company grows bigger, it makes the average costs lower, and for a nation-wide company, if one company controls the power then the overall wealth is higher than if there were competition as a result naturally monopoly is created.

• Why don’t more companies make jumbo jets?

Produce jumbo jets cost a fortune and the actual manufacturing of each jumbo jet takes a very long time. Boeing and Airbus have experienced economies of scale, and this can only happen in the long run. A new company will have not experienced economies of scale because of their short term presence. Because they do not receive the same amount of power as Boeing and Airbus, such as a large influence in the prices in the resource market, the new firms will have a high average cost and therefore their price per unit would be extremely large.

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65. Gökçe G&on 04 Dec 2010 at 3:26 am

@Ozge_Elif_Ozer

A good post demonstrating a good basic understanding of the theory of economies and diseconomies of scale and you are good at giving relevant examples.

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66. Dilan_Guneson 04 Dec 2010 at 8:44 pm

• What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

It means that the firm is in diseconomies of scale. In history there were a lot of empires that perished because of having big land. When the size of empires increases it will not be a problem for the optimum quantity in economies of scale but when it turns to diseconomies of scale the empire will lose the control on the lands it has and it will be like diminishing returns.

• Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

A natural monopoly is something about the largest supplier in an industry (the first supplier in the market), has an advantage than the other competitors. This tends to be economies of scale that are large in relation to the size of the market. For example public utilities (water services, electricity). “It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines); therefore, it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolist's market.” (http://en.wikipedia.org/wiki/Natural_monopoly)

• Why don’t more companies make jumbo jets?

The cost of production is too high for making jumbo jets that’s why the companies don’t make it. The technological machines are too expensive. There are a small amount of companies which make jumbo jets because of the barriers to entering that industry.

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67. Dilan_Guneson 04 Dec 2010 at 8:55 pm

Response to Cedric Uribe:

I really like the way you explained each question with using economics terminology. The example you mentioned in the first question is giving the answer of the question in a way.

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68. Muhammet_Murat_Sekbaon 05 Dec 2010 at 10:56 pm

• What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

Too big for its own good means that the company has diseconomies of scale. These reasons are poor communication, lack of motivation, difficulty of making useful decisions and coordination of workers due to the large size. As we understand one of the main problem is management problem. Since the company grows, the management of this company should be controlled , actually it will be really difficult. Moreover, management can go corrupt quite easily due to lack of control. We can give Ottoman empire. The empire was controlling the 3 mainland all over the world. Since, there were many county, and they were trying to control of the land in central place. It was a difficult situation and finally, they had started to fragment.

• Why does your hometown have only one electricity company? Why aren’t utility industries such as water, natural gas, and garbage collection more competitive? How does the concept of economies of scale lead to certain industries being “natural monopolies”?

Having competition between the industries would lead to inefficiency. They are controlled by the government. By the growing of the single company, it would also affect the costs and the costs would be lower. When there are large economies of scale because the biggest producer can undercut the prices of the others and drive them out . As a result the natural monopoly is created.

• Why don’t more companies make jumbo jets?

Since producing a jumbo jets cost a really huge amount money, and also manufacturing of each jumbo jet takes a very long time, each company can’t be successful . Around the world there are two famous jets producers which are Boeing and Airbus. These companies experienced the economies scale however, a new company will have not experienced economies of scale because of their short term presence. To sum up, since there will be high average cost and large price unit, more companies make jumbo jets.

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69. Muhammet_Murat_Sekbaon 05 Dec 2010 at 11:02 pm

Mehmet_Mert_Suma

A good post demonstrating a good basic understanding of the teory of economics. Your response shows a very good understanding of topic.

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70. Gloriana Gonz&aacuteon 06 Dec 2010 at 5:21 am

That a firm becomes “too big for its own good” means that the bigger a firm gets, at the beginning it might bring many advantages, but there may come a point in which the firm gets way too big, that the advantages that i had, no longer exist. Like this article says, “When an organization becomes too big, it begins to expirience inefficies”. Example of firms that became too big for their own good are past empires that thought that by getting bigger and bigger would obtain more power and ultimetly become the best empires. But there came a point in which these empires got way too big and lost power. Some of there empires split and others simply fell.

My hometown has only one electricity company becuase the cost of production is very high and the demand is more or less the same over an immediate time. These companies also have to comply with very stict laws and regulations that in order to server their purpose, consequently act as barries for new competitions in ths market. In Costa Rica it is a monopoly because the law only lets the government run these industries.

Economies of scale lead this and other countries to natural monopolies because they grow to such a large size that only they can give a competitive price of the consumer.

More companies won;t make jumbo jets because they are very expensiv and require a lot of specialization.

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71. Gloriana Gonz&aacuteon 06 Dec 2010 at 1:11 pm

That a firm becomes “too big for its own good” means that the biger a company gets, it may bring benefits at the beginning, but at some point it will reach concequences, were the benefits no longer exist. Like this article says, “When an organization becomes too big, it begins to expirience inefficies”. This shows how a company if it gets to big, will have more conquecenes than benefits and will hurt it economy. There are some cases were a company may get bigger and obtain lots of power and become one of the best, but there is also an opportunity were they get to its maximum where they are way too big, and start lossing what they had. Some of this companies what they do is split or simply fall.

My hometown had only one electricity company becuase the demand is more or less the same over a period of time and the cost of the production is very high. They have to follow several very strict rules in order to server for this purpose and not many companies are willing to follow these. Costa Rica can be interpreted as a monopoly because the government dicides which industries are the ones incharge.

More companies won’t make jumbo jets because they are very expensive and require a lot of specialization. People and companies are not all willing to do this type of work.

Response to Daniella Majluf:

I agree with you. You have interesting ideas and we share the same idea of why more companies won’t make jumbo jets. I also enjoy how you explain well “too big for its own good”.

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72. Kansu Aydoganon 10 Dec 2010 at 3:50 pm

1.) If a firm grows so large, then it gets hard to manage the workforce. As there will be lack of communication, there is also going to be growth of burocracy. I can give Ottoman Empire as an example of this situation.

2.) Since it is hard to enter the sector, because there is already one company which is producing electricity, so that there won’t any profit for them and that is the reason why there is just one company producing electricity. It is not like water, natural gas and garbage because of that reason.

3.) Since making jumbo jet is pretty expensive, small companies are not able to produce that luxury products.

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73. Ashini Jagtianion 12 Dec 2010 at 1:27 am

Mcdonalds would be a good example. According to me the company expanded to such an extent that now in countries like India there have been problems with the food management and concerns related to health. The burger empire grew very large in the beginning and now is on the verge of a collapse- the same can be said of the American economy which build up at first during the Bush administration and now is rapidly collapsing

Certain companies need a lot of initial investment along with some very advanced technology which is why it is tough to enter these sectors- automatically giving some companies a monopoly. In some places only the government run the electricity companies because of all the technical aspects and laws which go under these sectors

Firstly the demand for jumbo jets is not very high. Secondly there is a barrier which restricts others companies from entering. Also the cost of producing jumbo jets is again very high along with its initial investment and technologies.

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74. Ashini Jagtianion 12 Dec 2010 at 1:29 am

@ Huanni_Wu

I really like the example of the Roman Empire which you used to explain the expansion of companies! It is an evidence in history which supports the rule all the more!

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75. Alehsanon 20 Feb 2011 at 10:30 pm

1. When a company becomes too big for its own good it is a diseconomy of scale. That is to say as the total output of the firm increases the cost of producing increases increasing the ( Average cost) AC. This occurs due to a number of reasons. In the long-run, when firms grow bigger communication becomes an issue. That is to say it is more difficult to communicate business decisions and some aspects of a firm may become inefficient. Particularly if a firm is multinational, translation becomes an issue and often leads to miscommunication. However, modern technology is a great aid of reducing miscommunication. Furthermore, companies may have an inefficient management. That is to say the process of decision making is becomes slower as when the firm grows larger seeking authority becomes more difficult as the level of bureaucracy is growing. All the above factors above can combine and interact to decrease the motivation and morale of the staff and as a result decrease the productivity of a firm. Thus the average production cost of the good will rise and the firm will become too big for its own good. A relevant example is the fall of the Greek empire of Alexander the great, which was simply too big, making communication difficult, to keep it up.

2. All of the utility industries in my home town listed, be it gas, water or electricity, are capital intensive firms. This means that it takes a large amount of fixed cost to enter the market. Thus, the risk for companies entering the market is very high and requires huge capital. This implies huge barriers to these markets that are not likely to be overcome by small firms. As a firm grows bigger, because of economies of scale, which grants advantages such as the possibility of bulk buying, the revenue of a firm increases as the cost of production is lower and the output is greater. Essentially, meaning greater profits. Thus, in the long run a company can become a “natural monopoly” because of its growth and the advantages that come with it.

3. The barriers to start a jumbo jet production are huge s. The production of jumbo jets is capital intensive and therefore has massive fixed costs, such as the number of firms that have to be set up and the expensive raw materials that have to be obtained. Thus, a huge capital is required. Meaning that any company willing to enter the business will have to take great risks entering the market. It is particularly difficult as jumbo jets are price elastic goods making it almost impossible for starter- firms to compete with the low prices of already existing firms.

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76. Nesibe Zirzak?ranon 18 Mar 2011 at 3:28 pm

1. What does it mean that a firm can become “too big for its own good”? Can you think of any other organizations (economic or otherwise) that have gotten so big that they’ve failed?

When a company becomes too big that means there is diseconomies of scale. Its cost per unit increases. There is poor communication throughout company, loss of motivation, loss of direction and coordination. Ottoman Empire is a good example of it. It had many areas of industries but it failed because it did not manage them all. It could not allocate its resources properly that lead to loss of efficieny.

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77. How to organize businesson 13 Jan 2012 at 4:10 am

[...]From short to long: Economies of scale and the long-run average total cost curve | Economics in Plain English[...]…

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78. extracoolon 28 Aug 2012 at 1:54 pm

no citation no reference

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