Diseconomies of scale
Topic: Production Function, Returns and Costs · NCERT: Beyond NCERT
Meaning
Diseconomies of scale are the rise in long-run average cost (LRAC) when a firm or industry grows beyond a certain size. LRAC is the cost per unit when all inputs can be changed. Diseconomies of scale match decreasing returns to scale, where doubling all inputs gives less than double the output. The causes are of two kinds:
- internal, inside the firm: poor coordination, managerial inefficiency and scarce inputs;
- external, from the crowded area or industry around it: congestion and rising land and wage costs.
Diseconomies of scale explain why the LRAC curve turns upward and why firms do not keep growing without limit.
Example
A company grows so large that decisions pass through many layers of managers. Coordination slows down, so cost per unit rises. A crowded industrial cluster can face the same problem as land and wages there become costly.
Don't confuse with
- Diminishing marginal product: a short-run idea, where one input rises while the others stay fixed. Diseconomies of scale are long-run, where all inputs rise together.
Related concepts
- Long run average cost
- Long run marginal cost
- Economies of scale
- Internal economies of scale
- External economies of scale
- Economies of scope
- Minimum efficient scale