Diseconomies of Scale

The decrease of efficiency in the making of a product by producing more of it. That is, diseconomies of scale occur when a company increases its output for a product such that it increases the cost per unit of the product. For example, assume that labor costs at a factory are constant as long as the factory produces between 100,000 and 500,000 units per month. If the factory produces more than 500,000 units per month, it may have to hire more workers, which would increase the cost per unit. It is easier for smaller companies to fall into diseconomies of scale because they have less control over their costs; indeed this can cause many smaller companies to be at a significant competitive disadvantage. See also: Economies of Scale.

diseconomies of scale

see ECONOMIES OF SCALE.

Fig. 48 Diseconomies of scale. In the range of output beyond point X, the firm is experiencing diseconomies of scale with costs increasing as output increases.

diseconomies of scale

the possible increase in long-run unit or AVERAGE COST that may occur as the scale of the firms’ output is increased beyond some critical point.

Initially, as output is increased, long-run average costs may at first decline, reflecting the presence of ECONOMIES OF SCALE, but after a certain point long-run average costs may start to rise. See Fig. 48 .

The most frequently cited sources of such diseconomies are the managerial and administration problems of controlling and coordinating large-scale operations and labour relations problems in large plants. See MINIMUM EFFICIENT SCALE, EXTERNAL DISECONOMIES OF SCALE.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005

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