Diseconomies Scale Assignment Help

Diseconomies of Scale are an economic term that occurs when a business or company grows so large that the costs per unit increase. As a result, there will be an increase in the marginal cost of the product, and eventually, this creates cost disadvantages for the company. This happens when economies of scale do not function for a firm any longer.  It results from technical issues in organisational management issues, resource constraints, or production processes on productive inputs. Here, the expansions of the business will increase the unit cost of production instead of decreasing costs in production. The complete opposite of diseconomies of scale will be the opposite of economies of scale. It refers to a situation that a business might experience as it begins to expand.

Few causes of diseconomies of scale:

• Reduced motivation
• Lack of coordination and loss of direction
• Communication breakdown

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Example of diseconomies of Scale

A perfect example of diseconomies of scale refers to the situation when the production of the company gets increased. As the level of production increases, it directly impacts the machinery involved in the production process and the labour. Overproduction can cause more trouble. It might wear down the machinery, which might end up causing damages and accidents to machinery. The real reason for the cost of production is the installation of new machinery and insurance cost, which results in diseconomies of scale.

Another example of diseconomies of scale will be large organisations struggling from the problem of coordination. Your lack of coordination will result in the inefficient performance of employees and wastage of resources. It has its effect even in the large organisation departments as they face problems of miscommunication.

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Diseconomies of Scale Graph

Diseconomies of scale happen as the average unit costs get increased. Take the graph given below, which shows at a point Q1; the average costs get increased. For a simplifying demonstration of the way the diseconomies operate, we have presented a graph below.  The graph will show the low point of the curve.

We will further explain things in detail with the graph mentioned below. The optimal scale for output is marked with Q. This is the point where the costs per unit stay at their lowest (marked C). With curves descending, the economics of scales gets lower costs. As the firms and their outputs get larger than Q and the curve starts to ascend, the firms' average cost increases.

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Economies and Diseconomies of Scale- Explain

Economies of scale are defined as cost advantages reaped by companies when companies become efficient.  Companies can help in achieving economies of scale by lowering costs as well as by increasing production. At any stage of the production process, economies of scale are realised by a firm. Here the production referred to the economic concept of production, and it involves activities related to the commodity.  Non-profits, governments, and even individuals also benefit from economies of scale. This takes place when an entity becomes more efficient, produces more, and lowers the costs as a result. It does not only benefit the organisation; consumers also enjoy its lower prices.

The two main types of economies of scale: internal and external.  While internal economies are controllable by management since they are internal to the company, external economies, on the other hand, depends on external factors which include geographic location, industry, or government.

In the long run, as business starts expanding, the unit cost of production increases, leading to diseconomies of scale. This occurs when the firm becomes too big. Causes of diseconomies of scale are office politics, top-heavy companies, communication costs, duplication of efforts, and supply chain disruptions.

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What is the difference between "diminishing marginal returns" and "diseconomies of scale"?

Some major differences between diminishing marginal returns and diseconomies of scale:

1. It is true that both concepts explain the reason for the increase in marginal cost after some point. But what separates them from each other is diminishing marginal returns are applied in the short run where there is at least one fixed factor. On the other hand, diseconomies of scale are applied in the long run when all factors are variable.
2. Diminishing marginal return that applies in the short run when at least one factor is fixed explains the increase in marginal cost. Diseconomies of scale explain the reason for the increase in average cost.
3. Diminishing return to scale explains the increase in average variable cost, whereas diseconomies of scale explain the reason for the increase of the average total cost.

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when a firm experiences diseconomies of scale

A firm experiences diseconomies scale in the following conditions:

• When it receives constant returns to scale
• When it moves down the experience curve
• When it gets steep learning curve as compared to its competitors
• When it produces at an output level beyond the minimum efficient scale

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