Diseconomies of Scale

Diseconomies of Scale

An economic concept referring to a situation in which economies of scale no longer function for a firm. Rather than experiencing continued decreasing costs per increase in output, firms see an increase in marginal cost when output is increased.

Notes:

Diseconomies of scale can sometimes occur for the follow reasons:

1) A specific process within a plant cannot produce the same quantity of output as another related process. For example, if in a product required both gadget A and gadget B, diseconomies of scale might occur if gadget B is produced at a slower rate than gadget A.

2) As output increases, costs of transporting the good to distant markets can increase enough to offset any economies of scale. For example, when a firm has a large plant capable of producing a large output located in one location, the more the firm produces, the more it needs to ship to distant locations.

See also: Classical Economics, Dismal Science, Economic Profit, Economics, Economies of Scale, Economies of Scope, Economic Value Added - EVA, Ramp Up