Diseconomies of Scale

Wednesday, January 25, 2017

Diseconomies of Scale
This is just opposite to economies of scale. Actually economies of scale cannot continue to exist for a long period of time. After optimum level too much of expansion will create diseconomies of scale. We say a firm is experiencing diseconomies of scale when:
  • the long run average cost of the firm is increasing
  • the percentage increase in input is higher than the percentage increase in output.
Diseconomies of scale arises when the expansion of the firm leads to a rise in long run average cost.

Types of Diseconomies of Scale
Types of diseconomies of scale are set out below.
1. Internal Diseconomies of Scale:
It refers to the disadvantages experienced by a firm when it internally grows beyond the optimum size. The following are its two main types;
  1. Management problems: When a firm grows beyond a certain limit it becomes less flexible and difficult to carry out the management functions like coordination, control, communication etc.
  2. Labour problems: Vast labour force, long chain of command and wider span of control make it difficult to obtain cooperation of individual workers.

2. External Diseconomies of Scale:
It refers to the disadvantages experienced by the whole industry when it expands beyond its optimal size. Growth of larger firms leads to diseconomies of scale because of the increased demand for the factors of production which pushes up the prices of them and the cost of production as well.
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