Diseconomies of Scale - Explained
What are Diseconomies of Scale?
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Table of ContentsWhat are Diseconomies of Scale?Why are Diseconomies of Scale Important?Problems With Diseconomies of ScaleExamples of Diseconomies of ScaleAcademic Research on Diseconomies of Scale
What are Diseconomies of Scale?
Diseconomies of scale is a situation whereby the costs per unit of a company rises as a result of growth in business. When this happens, the marginal cost of a product increases and this creates costs disadvantages for the company. In diseconomies of scale, the expansion of a business creates an increase in the unit cost of production, rather than a decrease in costs of production. Economies of scale are the opposite of diseconomies of scale. Diseconomies of scale are realized when economies of scale reach their limit and there is an increase in the costs per unit of items produced by a business.
Why are Diseconomies of Scale Important?
Diseconomies of scale is an economic situation that a business might experience when it begins to expand. The expansion of a business or company, whether in size or output hat creates an increase in the cost per unit of items produces is known as diseconomies of scale. Several reasons/factors lead to the occurrence of diseconomies of scale, the major factors are;
- An overwhelming increase in the number of employees, equipment, machinery that a company has.
- The inability of a company to effectively manage organizational growth or increase in size and workforce strength.
- An increase in the level of waste due to difficulty in managing large resources.
Problems With Diseconomies of Scale
Essentially, diseconomies of scale occur after economies of scale have reached their limits and all the cost-reducing benefits of production are realized. Lack of adequate business coordination or difficulty in managing the large workforce of a business lead to diseconomies of scale. Diseconomies of scale have some problems associated with it, these are;
- It reduces effective communication in a company or business.
- It creates a leg between operations and the level of outputs.
- It causes a decline in motivation of employees, this is because they feel they are not doing enough or are less-valued and thereby become demotivated.
Examples of Diseconomies of Scale
Overcrowding of employees or an alarming increase in a companys workforce is often the major cause of diseconomies of scale. When employees are too many and are difficult to manage, it creates problems for a company. For instance, communication will be more cumbersome when there are too many employees and too many resources (machines, equipment, and raw materials) in a company. Diseconomies of scale are realized after a company it reached its economies of scale limit. As the company increases in size, there is also an increase in the costs per unit of items produced.