Cambridge O Level Business Studies · Syllabus 7115 · Operations Management
Diseconomies of Scale
What is Diseconomies of Scale?
Increases in the average cost of production caused by a business becoming too large to coordinate effectively. They arise from poor communication, weak coordination between departments, slow decision-making, management overload and a loss of employee commitment, all of which reduce productivity and quality and so raise cost per unit.
This definition is part of the Operations Management chapter in Cambridge O Level Business Studies.
Diseconomies of Scale in context
Production methods, cost behaviour and break-even analysis together decide whether a business can make what customers want at a price the market will support. Job, batch and flow production are not ranked best to worst; volume, variety, customisation, capital and demand stability determine which method fits a given product. Fixed costs stay the same regardless of output, while variable costs rise directly with it, and contribution per unit — price minus variable cost — sets both the break-even output and the margin of safety. Economies of scale then reduce average cost as output grows, while diseconomies of scale raise it once a business becomes too large to coordinate effectively.
Questions students ask about Diseconomies of Scale
Does economies of scale mean total cost falls as a business grows?
No. Economies of scale mean average cost per unit falls as output rises; total cost normally still rises as a business grows and produces more. If communication, coordination or decision-making deteriorate as the business gets larger, average cost can rise instead, which is diseconomies of scale rather than economies of scale.