Diseconomies of Scale (Edexcel IGCSE Business)

Revision Note

Lisa Eades

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

Diagram to show diseconomies of scale


 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.

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.