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External Diseconomies of Scale

External Diseconomies of Scale

These are the disadvantages that confront firms in an industry, as the industry grows larger beyond the optimal size. These disadvantages are due to external factors within the industry and not from within the setup of the firms. Examples of these external diseconomies are:

(i) Increasing Raw material Cost:

If an industry is growing, there will be an increase in the demand for raw materials mainly used in the industry. If supply conditions remain the same, then this will lead to an increase in the price of raw materials and subsequently, an increase in the firms’ unit cost of production within the industry.

(ii) Increasing Cost of Skilled Labour:

As firms demand more skilled labour, they tend to compete among themselves for the limited pool of such labour in the industry. To entice such labour to move from one firm to another, one has to bid up the wage rate. This invariably leads to an increase in production costs of the firms in the industry and the resultant increase in unit cost of production.

(iii) Excess Marketing Cost:

With the increase in the number of firms in the industry because of the growth of the industry, each firm has to compete for market shares or consumers. Advertising and other marketing strategies like sales promotions, therefore, become the order of the day. The consequence of these is an increase in unit cost of production of firms in the industry.

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