Diseconomies of scale

Diseconomies of scale is the point where a business no longer experiences decreasing costs per unit of output. Rather, after this point, costs per unit tend to increase.

Graphically, if output is on the X-axis, and average cost per unit is on the Y-axis, the economy of scale line curves downward from left to right. But as the line continues curving to the right, it reaches a point where it flattens and then begins to curve upward. The point where it starts curving upward represents the diseconomies of scale. 

A number of factors contribute to diseconomies of scale. 

For instance, if the manufacturing process involves multiple steps, there may be a volume level that creates a bottleneck for one process.  If, in the factory, process A is unlimited, but process B can only manage 50,000 units, then the company will experience diseconomies of scale above 50,000 units due to the added cost of acquiring more capacity for process B.

Shipping can also create diseconomies of scale.  For instance, a candle manufacturer sells candles to local merchants only. But if that candle manufacturer develops a website to increase production, then sells candles throughout the world, the added costs of shipping the candles may negate any cost savings resulting from increased output.

Finally, as a company grows, it has more communication and bureaucracy issues that interfere with efficiency.  If everything runs well, the concept of economies of scale works, but more output requires more people to run the company. 

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