Diseconomies of Scale (Edexcel IGCSE Business)
Exam board Pearson Edexcel · IGCSEUpdated 2025-06-23
Spec point —
5.1.2· Diseconomies of scale: • limits of growth.
Diseconomies of scale
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As a firm continues increasing its scale of output, it will reach a point where its average costs (AC) will start to increase
- The reasons for the increase in the average costs are called diseconomies of scale
Diseconomies of scale and average costs
- Diseconomies of scale occur when average costs increase with increasing output*
- At some level of output, a firm will not be able to reduce costs any further. This point is called productive efficiency
- Beyond this level of output, the average cost will begin to rise as a result of diseconomies of scale
- This indicates that there is an optimal level of output that exists when the state of technology and capital (machinery) is fixed
Types of diseconomies of scale
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Diseconomies of scale highlight that it is possible for a business to become so large that it becomes less and less efficient
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A business experiencing diseconomies of scale may reconsider its organisational structure to improve communication and coordination problems
- Many very large businesses often break themselves up into autonomous smaller units, which can communicate more effectively
Explanation of diseconomies of scale
| Type | Explanation |
|---|---|
| Poor communication and coordination | - As a business increases in size, more managers and employees will join the business and the chain of command is likely to lengthen, limiting interaction with employees - Communication becomes slower and mistakes may be made, leading to worsening efficiency - Time-consuming decision-making may make it harder to coordinate workers and physical resources |
| Increased bureaucracy | - Larger businesses are more complicated to run and organise than small businesses - Coordinating the many resources required will require extensive administration for which staff and physical resources will be required |
| Lack of commitment from employees | - As the business grows workers may feel less valued as their interaction with management is limited - Workers may become demotivated leading to a fall in output which can increase average costs |
Exam Hint Candidates frequently confuse economies and diseconomies of scale in exams. Make sure that you can define both terms and give examples of why each could arise.
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