Diseconomies of Scale

Plain definition

Cost disadvantages that arise when a firm grows so large that long-run average cost per unit starts rising.

In economics

Diseconomies of scale set in when coordination problems, bureaucracy, and communication breakdowns outweigh the benefits of size — the LRAC curve turns upward. They explain why even giant firms have an efficient size limit and why many industries contain medium-sized firms alongside giants.

Example

A conglomerate so large that layers of management slow every decision can see its per-unit costs rise beyond a certain output level.

Common confusion

Diseconomies of scale are confused with diminishing returns. Diminishing returns is a short-run phenomenon with fixed inputs; diseconomies of scale happen in the long run when all inputs grow. Constant returns to scale — flat LRAC — is the middle case between the two.