7.13 : Diseconomies of Scale

Diseconomies of scale occur in the long run when the costs per unit increase with each additional unit of output. For example, the firm may double its production but only by tripling its costs. This phenomenon is the opposite of economies of scale.

When the long-run average total cost remains constant with an increase in output, the firm is experiencing constant economies of scale. For example the firm's costs double when it doubles the level of output. As the firm expands its production, its per-unit cost stays the same.

Constant Economies of Scale

For example, a shipping firm may expand its operations, which requires a new ship, new crew members, etc. Each ship operates independently, following predetermined paths that, despite occasionally crossing the vast ocean, do not allow for the cost savings typically associated with fleet expansion in other transportation modes. So, the firm does not experience a rise or fall in the average cost. Its long run average cost remains constant.

U-shaped Average Cost Curve in the Long Run

As a firm grows and expands its output in the long run, it typically experiences economies of scale and enjoys falling average costs. Then, the firm's average costs tend to remain constant over the next interval of output as the firm experiences constant economies of scale. Once it reaches a very high level of output, the firm will typically begin to experience diseconomies of scale and its average costs start to increase. This creates the U-shaped average cost curve in the long run.