Have you ever wondered what might be the reason why some companies experience higher average costs with increased output while others don’t? What are some of the factors that impact a firm’s average costs and what can a firm do to reduce its costs?
To answer these questions, you would have to know about the diseconomies of scale. This explanation will help you understand diseconomies of scale.
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Diseconomies of scale: definition
Diseconomies of scale point out the relationship between the average costs of a firm and its total output.
Diseconomies of scale usually occur when a firm does no longer experiences economies of scale.
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Economies of scale? Yes, economies of scale are the opposite of diseconomies of scale, as the name suggests. They occur when a company experiences a decrease in average cost as the total output increases.
The main difference between the two is that the average cost increases with increases in output when a firm is experiencing diseconomies of scale, and it decreases with an increase in production when experiencing economies of scale.
Diseconomies of scale can be very harmful to a firm. There are many reasons why a firm might experience diseconomies of scale. We will consider some of these reasons later on.
The diseconomies of scale graph
We can depict diseconomies of scale through a diagram, which we can see in figure 1 below.
Fig. 1 – Diseconomies of Scale, StudySmarter Originals
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In figure 1, at point C* the firm can produce Q* level of output at the lowest cost possible. After this point, the firm’s cost per additional output produced increases. When the firm moves from producing Q* level of output to Q1, the cost per input increases from C* to C1. When the firm increases its production from Q1 to Q2, the cost per input increases even more, from C1 to C2.
We can further understand how diseconomies of scale work with the example of a coffee shop.
Fig. 2 – A coffee shop, Pixabay.
Reasons for diseconomies of scale
There are many factors at play when a firm experiences diseconomies of scale. We will look at three of these reasons (Figure 2):
- Managerial diseconomies of scale.
- Communication failure.
- Motivational diseconomies of scale.
Fig. 3 – Reasons for diseconomies of scale
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