Diseconomies of Scale

Overview

• Diseconomies of scale occur when a business grows or increases output beyond a certain point, leading to an increase in the average cost per unit.
• Illustrated by a cost curve with cost per unit on the y-axis and output on the x-axis.
• The curve is divided into two segments:
  • Black segment: Represents achieving economies of scale (cost per unit decreases with increased output).
  • Red segment: Represents diseconomies of scale (cost per unit increases with increased output).

Minimum Efficient Scale

• The point where economies of scale are maximized.
• Beyond this point, increasing output leads to diseconomies of scale.

Reasons for Diseconomies of Scale

1. Employee Coordination
   • Overcrowding of employees in areas like operations or marketing.
   • Duplication of tasks, leading to increased costs.
   • Analogy: “Too many cooks in the kitchen.”
2. Employee Motivation
   • Employees feel less significant in a large workforce, leading to demotivation.
   • Reduced productivity and higher waste.
3. Employee Communication
   • Increased costs for disseminating information from senior management.
   • Top-down communication approach can demotivate employees.

Key Takeaways

• Diseconomies of scale highlight the limitations of growth in terms of cost efficiency.
• Effective management of employee coordination, motivation, and communication is crucial to mitigate the negative effects of scaling.