Diseconomies of Scale
- As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase
- The reasons for the increase in the average costs are called diseconomies of scale
Diagram: Diseconomies of Scale & Average Costs
Diseconomies of scale occur when average costs increase with increasing output
Diagram analysis
- At some level of output, a firm will not be able to reduce costs any further. This point is called productive efficiency
- Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale
- This indicates that there is an optimal level of output that exists when the state of technology and capital (machinery) is fixed
Types of Diseconomies of Scale
- Diseconomies of scale highlight that it is possible for a business to become so large that it becomes less and less efficient
- A business experiencing diseconomies of scale may reconsider its organisational structure to improve communication and coordination problems
- Many very large businesses often break themselves up into autonomous smaller units, which can communicate more effectively
- Many very large businesses often break themselves up into autonomous smaller units, which can communicate more effectively
Explanation of Diseconomies of Scale
Type of Diseconomy of Scale |
Explanation |
Poor communication & coordination |
|
Increased bureaucracy |
|
Lack of commitment from employees |
|
Exam Tip
Candidates frequently confuse economies and diseconomies of scale in exams. Make sure that you can define both terms and give examples of why each could arise.