Scale refers to the size of something. So in the simplest of terms, diseconomies of scale refers to the disadvantages for a firm of getting larger and larger in size. In this case, size is measured by the firms total output.
Generally speaking, as a firm produces more output, the day to day operations of the business become more efficient and the average cost of producing one unit of output decreases. However, efficiency cannot be increased forever. Eventually, a firm will reach a point where their large size actually becomes a disadvantage as the day to day operations become increasingly less efficient.
What are the diseconomies of scale?
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Key terms:
Average cost – the cost of producing one unit of output.
Bureaucracy – overly complicated administrative processes.