Diseconomies of Scale (Cambridge (CIE) IGCSE Business)

Diseconomies of Scale

• As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale

Diagram: diseconomies of scale

  Diagram analysis

• At some level of output, a firm will not be able to reduce costs any further. This point is called productive efficiency

• Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale

• This indicates that there is an optimal level of output that exists when the state of technology and capital (machinery) is fixed

Different types of diseconomies of scale

• Diseconomies of scale highlight that it is possible for a business to become so large that it becomes less and less efficient

• A business experiencing diseconomies of scale may reconsider its organisational structure to improve communication and coordination problems

  • Many very large businesses often break themselves up into autonomous smaller units, which can communicate more effectively

Explanation of Diseconomies of Scale