Diseconomies of scale – How is it affect the costs of products?


Diseconomy happens when the entity wants to decrease production costs or direct costs through increasing labor force and machinery but the result is not as what they want.

The productions costs per unit increase while entities deploy more labor force and machinery. The main reason is the marginal cost increase while the production increase.

How diseconomy is affect to the costs of products?

There are many reasons why marginal costs increase while the increase of production. For example, an increased workforce leads to insufficient supervision and lead to low productivities, and is well qualified.

Increased labor force may also need to increase the supervisory level and this lead to an increase the more labor cost.

A small number of machines might produce the same productivities, yet increasing more machines might be different.

The machine will not produce the same units of products as what the entity wants and this leads to poor control on a large number of machines. The cost will also increase base on this inefficiency of machine management.

When there is a large number of people, the communication will automatically become less effective. Some people, groups of people in units, departments, and divisions will feel isolated.

Other costs that are not related to productions costs are increasing while the productions are increasing. For example, transportation costs for delivering goods from factories to the store locations.

When diseconomy is happened?

Fast growing:

Some business grows very fast and entity face such situation normally deploys more people or and machines. They expected the cost of products or services will decrease due to increasing the production line and people.

Related article  What Is Economy Pricing? - And How Does It Work? (Explained with Example)

However, managing a large workforce and machines is not the same as managing a small group of people and a small number of machines. They normally face the problem as we stated above. Therefore, di economic of scale happen.

High Price Competition Industry:

There are a lot of competitors in the market, some entities look into the production costs to let them stay at the competitive price.

Increasing the production belief to be one of the options that help entity decrease marginal costs therefore, the entity decided to deploy more people or machines. As the result, a diseconomy of scale happens.