Diseconomies of Scale
Business: Cambridge International GCSE (2027 Exams), topic 4.2.4
Diseconomies of Scale
Diseconomies of scale happen when a business grows so large that the business’ products average unit cost (cost per unit) increases. Diseconomies of scale can happen for a number of reasons:
Coordination issues
- As a firm grows, the way the firm functions or operates becomes more complex.
- There may be new departments and different teams located in different places (nationally or internationally).
- This can make it harder and more expensive to manage effectively. This can lead to diseconomies of scale.
Communication issues
- In a larger business, communication becomes more difficult because of the size of the workforce and the number of different divisions in the business.
Lower employee motivation
- Workers can become demotivated if they feel like a cog in a wheel and can’t see the impact of their work on the business’ overall performance.
- This can lead to a drop in productivity and an increase in average unit cost.
Case study: Big Bake Ltd
- Big Bake Ltd started as a small family bakery and expanded by opening more factories and hiring hundreds of staff.
- At first, the company benefited from economies of scale:
- Buying ingredients in bulk and using efficient equipment reduced the cost per loaf of bread.
Big Bake Ltd
- As the company grew too large, it faced diseconomies of scale:
- Communication problems: Messages got lost or misunderstood, causing mistakes in production.
- Lack of motivation: Employees felt like just a number, reducing productivity.
- Poor coordination: Managing multiple factories and large teams became difficult, causing delays and confusion.
- Because of these issues, the average cost per loaf increased, showing diseconomies of scale in action.
Test yourself on Diseconomies of Scale
What type of diseconomies of scale does the following statement represent: New departments and different teams located in different places can make it harder and more expensive to manage effectively?