What is diseconomies of scale?

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?

1. Bureaucracy – as firms get larger, there are often more layers of management and administrative tasks that need completing. This leads to  employees wasting time on bureaucratic tasks rather than focusing on their work.
2. Communication problems – as firms get larger, it takes longer for employees to communicate across departments. In addition, many large firms have global operations, and this can lead to communication breakdown resulting from language and cultural differences.
3. Control and coordination – as firms get larger they get more difficult to control. As a result more supervision and layers of management is required in order to coordinate the business operations efficiently. This can be costly.

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Key terms:

Average cost – the cost of producing one unit of output.

Bureaucracy – overly complicated administrative processes.

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