A diseconomy of scale is an anomaly of the basic rule of economics that is the more a company produces lower will be its marginal cost per unit. Hence for example if company is producing 10000 units than margin cost per unit is $10 per unit and if company is into that production line in which marginal cost per unit declines by 10 percent on doubling of production than if company increases its production to 20000 units than according to economies of scale marginal cost per unit will be $9 per unit. In case of diseconomies of scales reverse happens that is the marginal cost per unit will be $11 per unit when the company increases production. In simple words companies became less efficient as it grows big, so what are the causes due to which company faces diseconomies of scale –
Causes for Diseconomies of Scale
Lack of Communication
Lack of communication is one of the reasons due to which company faces diseconomies of scale, because as the company becomes big it becomes difficult to coordinate all the work besides as company grows it leads to multiple channels of communication in the company thereby making the whole process of communication complicated and time-consuming which leads to lower efficiency on the part of the company.
Overcrowding Effect
In a restaurant, if there is a space of 10 tables but due to good customer response, the owner increases the number of tables to 15 than it will result in overcrowding and waiters will come in each other’s way while serving food to the customers resulting in dissatisfied customers. In the same way in case of companies when more machines and labor are put in factories than it can accommodate.
Related Products Problem
Another reason for diseconomies of scale is when the company has two products which are related to each other and if production of product B requires the help of product A than any delay or inefficiency in the production of product A will result in the delay of product B also. Hence if company product is such that it requires two processes than both the processes should work efficiently in tandem otherwise company will face diseconomies of scale.
Transportation of Goods to Distant Markets
In case of products, there is limit up to which a company can sell a particular product to nearby markets and once company produces more than required for nearby markets than it has to send excess products to distant markets which involve substantial transportation cost which in turn offset all the gains achieved due to large-scale production of goods.
As one can see from the above that diseconomies of scale are nor long-lasting neither incurable rather it can be improved upon if company amend its policy and work style so to remove the loopholes from the company which is resulting in diseconomies of scale.