What are Diseconomies of Scale?

Diseconomies of scale is a situation whereby the costs per unit of a company rises as a result of growth in business. When this happens, the marginal cost of a product increases and this creates costs disadvantages for the company. In diseconomies of scale, the expansion of a business creates an increase in the unit cost of production, rather than a decrease in costs of production. Economies of scale are the opposite of diseconomies of scale. Diseconomies of scale are realized when economies of scale reach their limit and there is an increase in the costs per unit of items produced by a business.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

Why are Diseconomies of Scale Important?

Diseconomies of scale is an economic situation that a business might experience when it begins to expand. The expansion of a business or company, whether in size or output hat creates an increase in the cost per unit of items produces is known as diseconomies of scale. Several reasons/factors lead to the occurrence of diseconomies of scale, the major factors are;

• An overwhelming increase in the number of employees, equipment, machinery that a company has.
• The inability of a company to effectively manage organizational growth or increase in size and workforce strength.
• An increase in the level of waste due to difficulty in managing large resources.

Problems With Diseconomies of Scale

Essentially, diseconomies of scale occur after economies of scale have reached their limits and all the cost-reducing benefits of production are realized. Lack of adequate business coordination or difficulty in managing the large workforce of a business lead to diseconomies of scale. Diseconomies of scale have some problems associated with it, these are;

• It reduces effective communication in a company or business.
• It creates a leg between operations and the level of outputs.
• It causes a decline in motivation of employees, this is because they feel they are not doing enough or are less-valued and thereby become demotivated.

Examples of Diseconomies of Scale

Overcrowding of employees or an alarming increase in a companys workforce is often the major cause of diseconomies of scale. When employees are too many and are difficult to manage, it creates problems for a company. For instance, communication will be more cumbersome when there are too many employees and too many resources (machines, equipment, and raw materials) in a company. Diseconomies of scale are realized after a company it reached its economies of scale limit. As the company increases in size, there is also an increase in the costs per unit of items produced.

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

Relate Topics

• Theory of the Firm
• Capital Formation
• Rent Seeking
• Structure Conduct Performance Model
• Integration
• Co-Insurance Effect
• Conglomerates
• Cost vs Profit Center
• Accelerator Theory
• Market Structure
• Fixed Cost vs Variable Cost
• Actual vs Implicit Costs
• Explicit Costs
• True Cost Economics
• Accounting Profit
• Economic Profit
• What are Factors of Production?
• Factor Income
• Production Function
• Fixed and Variable Inputs
• Short-Run and Long-Run Production
• Short Run
• Total Product
• Marginal Product
• Value of Marginal Product
• Law of Marginal Diminishing Product
• Production Function
• Production Possibilities Frontier
• Capital 
• Labor Theory of Value
• How the Production Function Estimates Inputs
• Factor Payment
• Economic Rent
• Cost Function
• Incremental Cost
• Marginal Input Cost  
• Fixed and Variable Costs
• Diminishing Marginal Productivity
• Costs Relate to Diminishing Marginal Productivity
• Law of Diminishing Marginal Returns
• Average Total Cost
• Average Variable Cost
• Marginal Cost
• Average Profit or Profit Margin
• Accounting Profit
• Economic Profit
• Normal Profit
• Short and Long-Run Production
• Cost Curves
• Long-Run Average Cost (LRAC)
• Production Technologies
• Economies of Scope
• Economies of Scale
• Diseconomies of Scale
• Minimum Efficient Scale
• Increasing, Constant, and Decreasing Returns to Scale
• Shape of the Average Long-Run and Short-Run Cost Curves
• Returns to Scale
• Diseconomies of Scale
• Long-Run Average Cost Curve Affect Industry Competitors
• Technology Shifts the Long-Run Average Cost Curve
• Law of Diminishing Marginal Returns