O LevelBusinessCambridge (CIE)Business StudiesRevision Notes4. Operations Management4.2 Costs, Break-even & Production ScaleDiseconomies of Scale

Diseconomies of Scale (Cambridge (CIE) O Level Business Studies)

Revision Note

Danielle Maguire

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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

Diseconomies of scale occur when average costs increase with increasing output
 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

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

Type of Diseconomy of Scale

Explanation

Poor communication

  • As a business increases in size, more managers and employees will join the business

  • Communication becomes slower and mistakes may be made, leading to worsening efficiency

Poor coordination

  • Time-consuming decision-making may make it harder to coordinate workers and physical resources

  • The chain of command is likely to lengthen, limiting interaction with employees

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

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    Danielle Maguire

    Author: Danielle Maguire

    Danielle is an experienced Business and Economics teacher who has taught GCSE, A-Level, BTEC and IB for 15 years. Danielle's career has taken her from across various parts of the UK including Liverpool and Yorkshire, along with teaching at a renowned international school in Dubai for 3 years. Danielle loves to engage students with real life examples and creative resources which allow students to put topics in a context they understand.