Diseconomies of Scale (Edexcel IGCSE Business)

Revision Note

Written by: Lisa Eades

Reviewed by: Steve Vorster

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 & Average Costs

Diseconomies of scale occur when average costs increase with increasing output

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

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

Type of Diseconomy of Scale	Explanation
Poor communication & coordination	As a business increases in size, more managers and employees will join the business and the chain of command is likely to lengthen, limiting interaction with employees Communication becomes slower and mistakes may be made, leading to worsening efficiency Time-consuming decision-making may make it harder to coordinate workers and physical resources
Increased bureaucracy	Larger businesses are more complicated to run and organise than small businesses Coordinating the many resources required will require extensive administration for which staff and physical resources will be required
Lack of commitment from employees	As the business grows workers may feel less valued as their interaction with management is limited Workers may become demotivated leading to a fall in output which can increase average costs

Examiner Tips and Tricks

Candidates frequently confuse economies and diseconomies of scale in exams. Make sure that you can define both terms and give examples of why each could arise.

Last updated: 10 October 2024

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