Business – 9.1 Location and scale – Scale of operations | e-Consult
9.1 Location and scale – Scale of operations (1 questions)
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Model Answer: Diseconomies of scale arise when a firm’s average costs start to increase as output expands beyond an optimal size. Three common causes are:
- Management complexity: Larger organisations require more layers of hierarchy, leading to slower decision‑making, miscommunication, and higher administrative overhead per unit.
- Motivation and coordination problems: As the workforce grows, employee motivation can fall and coordinating activities becomes harder, resulting in inefficiencies and higher labour costs per unit.
- Resource constraints: Over‑use of equipment or facilities can cause wear, breakdowns, and the need for overtime, all of which raise the marginal cost of production.
These factors push the unit cost curve upward after the point of minimum efficient scale, indicating diseconomies of scale.