15 - What is diseconomies of scale?

Explain the causative

factors of diseconomies of scale.

In microeconomics, diseconomies of scale are the cost disadvantages that

economic actors accrue due to an increase in organizational size or in output,
resulting in production of goods and services at increased per-unit costs. The
concept of diseconomies of scale is the opposite of economies of scale. In
business, diseconomies of scale [1] are the features that lead to an increase in
average costs as a business grows beyond a certain size.

In economic jargon, diseconomies of scale occur when average unit costs start to
increase. For example, the graph below illustrates that at a point Q1, average
costs start to increase.

Diseconomies of scale are when the cost per unit of production (Average cost)
increases because the output (sales) increases.
Diseconomies of scale occur because of several reasons; this situation is the result
of the difficulties of managing a larger Workforce.

Causative factors of diseconomies of scale:

1. Internal diseconomies of scale

Internal diseconomies occur as the output of the firm is rising.

a) Interdependence:

Large firms with many and different departments have the problem with
interdependency with each other. A machine failure in the packaging department
may result in stopping the whole production line.

b) Coordination and communication:

As the business expands communicating between different departments and

along the chain of command becomes more difficult. There are more layers in the
hierarchy that can distort a message and wider spans of control for managers.
This may result in workers having less clear instructions from management about
what they are supposed to do when.

c) Mismanagement:

One of the main causes of diseconomies of scale or internal diseconomies is the

difficulties of large-scale management. As a firm expands, difficulties of
management go on multiplying. In a big firm, it becomes pretty difficult to co-
ordinate the work of different sections. It becomes a tough problem to supervise
the work spread all over. It adversely affects operational efficiency of the firm.

d) Industrial relations:

Because of the lack of contact between senior management and the work force,
the workers may not feel commitment to work. Industrial disputes may arise and
production may suffer.
 e) Lack of motivation:

Workers can often feel more isolated and less appreciated in a larger business
and so their loyalty and motivation may decrease. It is harder for managers to
stay in day-to-day contact with workers and build up a good team environment
and sense of belonging. The main result of poor employee motivation is fall in
productivity levels and an increase in average labour costs per unit.

f) Lack of control:

When there are a large number of workers it is easier to escape with not working
very hard because it is more difficult for managers to notice shirking.

2. External diseconomies of scale

External factors beyond the control of a company increases its total costs, as
output in the rest of the industry increases. The increase in costs can be
associated with market prices increasing for some or all of the factors of
production.

For example, as a business increases its output, more pressure might be put on its
labor supplies, which would then raise the price of additional output. The
availability of raw materials also might cause the cost of production to rise. A
mining firm, for example, might first extract minerals that are easy to access.
After it is necessary to mine deeper seams to produce more ore, the cost of
additional output will rise.

As output increases in an industry, each of the factors of production, land, labour,

capital and enterprise, become scarcer. As they become scarce (unavailability),
their prices increase.