diseconomies of scale

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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

Diseconomies of scaleclick for a larger image
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.

References in periodicals archive ?
But more labour, with no improvement in either management structures, governance or operational efficiency will finally lead to what economists call diseconomies of scale or the forces that cause larger inefficient organisations to produce goods and services at increased per-unit costs.
The size and complexity of mining operations have created diseconomies of scale and are a significant factor in diminished productivity in the global mining sector, according to a new research report by EY and the University of Queensland (UQ), released today.
as indicative of economies and diseconomies of scale and economies of density); (3) relationships between (a) transport firms' cost and market structure conditions, (b) transport service pricing policies and practices, and (c) public policy choices toward regulation of transport providers' economic behavior; and (4) linkages between the cost of transport service (as incurred by freight shippers and passengers) and the location of commercial and residential economic activity.
Stimpert and Laux (2011) reported that while costs decline and profitability increases as bank size increases, these relationships do not hold indefinitely and diseconomies of scale are experienced by larger banks.
farnsworth believes the alternative of reintroducing a levy on foreign racing - abolished by the Levy Board more than ten years ago - would be legally challenged by the betting industry, and introducing Scottish equivalents to the Levy Board and governing body would impose additional institutional costs and the country's racing industry would suffer from diseconomies of scale compared to the BHA and Levy Board.
For instance, Chaudhury (2008) stresses these common denominators of SMEs: low risk propensity, centralization and low formalism level, diseconomies of scale and limited autonomy, cultural insularity and identity-based trust relationships.
The diseconomies of scale may be due to more complex systems, sorting through more no shows, and difficulty in coordinating patient care.
Diseconomies of scale refer to the increased per unit cost with an increase in output.
Although many LDCs are smaller than the optimal size, diseconomies of scale suggest that creating a few very large LDCs from a number of smaller LDCs might not be the most economically efficient outcome (Figure 3).
Diseconomies of scale occur when the percentage increase in a company's operations result in lower percentage increase in a company's output.
More often it is the diseconomies of scale that eventually emerge.
From the economical context, the results showed that most of the real estate and construction companies are experiencing diseconomies of scale (from the decreasing results in scale efficiency).