Diseconomies of Scale

Diseconomies of scale are disadvantages that result from large scale production or large scale provision of services by a single firm. Diseconomies are the result of factors such as coordination difficulties, duplication of job positions, etc.

When a small firm expands its scale of production, it initially gains cost advantages (called economies of scale), in the form of reducing average cost per unit of goods or service produced. At a certain optimum firm size, the cost advantages are maximized and beyond this point, the economies are overcome by the diseconomies of scale and the average production cost starts to rise.

Diseconomies of scale are therefore reflected in the raised part of long run long-term average cost curve of a firm as shown below:

Diseconomies of Scale Chart

Factors

Few of the factors which may be responsible for diseconomies of scale are:

Coordination Problems: Large businesses are difficult to organize and run seamlessly. Management finds it difficult to direct and coordinate the efforts of individuals and teams. In this situation, the aim of individuals’ and teams’ efforts may not be aligned with the objectives of organization as whole. Large firms are also slow to respond to market conditions compared to smaller ones which are generally more agile.

Duplication of Effort: As the firms increase in size, there is more and more need for middle management whose job is to enable communication between top managements and work teams. In other words, there is duplication of management. Also there may be duplication of service department staff. Duplication increases average unit cost.

Duplication of Products: A large firm may find itself in a position where its own products are services are substitutes and are competing with each other. This increases costs compared to revenue.

Written by Irfanullah Jan and last modified on