Diseconomies of Scale | Business Studies for GCSE/IGCSE - Year 11 PDF Download

Diseconomies of Scale

• As a company increases its scale of production, it will eventually experience a point where its average costs begin to rise. This increase in average costs is known as diseconomies of scale.
• The term "diseconomies of scale" refers to the situation where the average costs of production increase as the output levels rise.

Diagram: Diseconomies of Scale

Diagram analysis

• A firm reaches a stage where it cannot further decrease costs, known as productive efficiency.
• Beyond this point, average costs start increasing due to diseconomies of scale.
• This signifies the existence of an optimal output level when technology and capital (machinery) are unchanged.

Different Examples of Diseconomies of Scale

• Inefficiency Due to Size: When a business expands excessively, it can become inefficient. For instance, a large corporation may face challenges in communication and coordination, prompting a need to restructure for improved efficiency.
• Organizational Restructuring: Companies experiencing diseconomies of scale often reorganize into smaller autonomous units to enhance communication and operational effectiveness.

Different types of diseconomies of scale

• Diseconomies of scale illustrate that a business may lose efficiency as it grows larger.
• Businesses facing diseconomies of scale might review their organizational structure to address issues with communication and coordination.
• Many exceedingly large businesses opt to divide themselves into smaller autonomous units to enhance communication effectiveness.

Explanation of Diseconomies of Scale