Economies and Diseconomies of scale: What does it mean?

Like two sides of the same coin, economies of scale and diseconomies of scale co-exist within a business, industry, city, state, nation and just about any organization.

What does scale here mean?

Traditionally, scale refers to products produced on some mass level.

Economies of Scale

In simple terms, ECONOMIES of scale refer to the idea that as more products are produced the marginal cost (Extra cost), or cost per unit, decreases because of increased efficiencies. Often the desire for economies of scale drives an organization to become larger or to merge with a like-minded company, which can bring additional efficiencies or opportunities.

But economies of scale have their limits. When this limit is reached it causes a disadvantage, the disadvantage is called diseconomies of scale.

Diseconomies of Scale

Diseconomies of scale come about when a business or organization becomes so big, or so inefficient, that the cost-per-unit of its products and services starts to rise a business can only grow so much before the benefits of growth begin to create additional costs and resources for example when organisation becomes so large and needs to employ more staff, its cost tends to increase as the company increases.

Factors causing economies and diseconomies of scale

Economies and diseconomies of scale are frequently broken down by the respective factors leading to a certain level of scale. Some factors are internal, while other factors come from outside the business. Internal factors such as technology, unique training methods, while external factors such as higher interest rates, government regulation or consumer ambivalence can create difficult diseconomies of scale.

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