Welcome back. After having learned the concepts and the pros and cons of economies of scale, it's now the time to get a bit more realistic and to also discuss possible hindrances to economies of scale and scope of and there can be quite a few. So, what are these sources of diseconomies? Where could these diseconomies of scale and scope come from? Well, to begin with we can think of labor cost as a source of diseconomies of scale. Larger firms often end up paying higher wages. Because unionization is more likely in larger firms. So, these unions enerally will negotiate higher wages for their members which, of course, means that the larger a firm is, the more likely it is to be paying higher wages. Secondly, employees in smaller firms might have more complete tasks and slightly more enjoyable work because the division of labor in large firms tends to be much more advanced. So, you might have to pay a premium for employees working in large firms. Finally, large firms may also have to attract workers from further away places. Why could that be? Well, if your local talent pool is just too small for the type of work that you need, or the type of tasks and skills that you need, you will have to start recruiting from further away and that means that you often have to at least pay the relocation cost and secondly you might also have to end up paying them a higher wage to make sure that they come and actually leave their home and so on. Second, there can be incentive and bureaucracy effects. So, when a firm gets large, it gets more difficult to monitor and communicate with workers. So, simply managing a larger number of people makes it less likely that you can communicate with them on a regular basis, and secondly, that you can monitor them and make sure that they actually work as you plan them to. So, one consequence of this might be that you have to introduce additional layers of middle management who will monitor and communicate and control workers below you. Secondly, it's going to be more difficult to evaluate and reward individual performance. So if for example, production is organized in teams, then allocating a piece of output to one particular person is going to be near impossible. So, evaluating and rewarding individual input or output is going to be impossible. Finally, for professional services firms, conflicting out might be a problem. This simply means that professional services firms may find it difficult to sign up a client if they already consulted or they already work for a competitor. So, this is especially strong, this effect is especially strong when sensitive information has to be shared, so these conflicts of working for different competitors might impose a limit to the growth of the firm. So, unfortunately, there's a limit to most things in life. And this is also true for real life applications of economies of scale and scope. In the next video, therefore, we'll consider supplier/buyer relationships and check out how we can evaluate whether it's more profitable to produce everything ourselves or whether we should simply buy what we need to create value. [BLANK]
