Definition of Diseconomies Of Scale
Diseconomies of scale is the opposite of economies of scale. So, when a firm reaches a point where the cost of a unit produced is increased when the output increased, this happens when the size of the firm increases and there are other costs added to the unit cost. In economies of scale, a firm would see the cost is decreasing and the output increasing, but in the diseconomies of scale, when a firm increases its output, the cost associated with the production increases.
Diseconomies of scale can occur due to fault in the company’s internal affairs, from bad management to a poor manufacturing process to a not well-designed supply chain network.
There can be many external factors that may cause Diseconomies of scale for a firm such as hype in energy prices, high wage rates, government taxes, etc.
Example of Diseconomies of Scale:
A firm was previously producing a unit for $10, with the installation of a new plant costing $75 Million, increasing the skilled labor operating that plant, and increasing the electricity consumption has resulted in the per-unit cost price jumping to $13. Previously the firm saw a decrease in unit price as the production increase but now it is increasing as the output has increased because of nearly added costs.