International General Certificate of Secondary Education (IGCSE) Business Studies Practice Exam

Diseconomies of scale refer to the phenomenon where as a company grows in size, the costs per unit of production start to increase. This can occur for various reasons, such as management inefficiencies, communication issues, and challenges in maintaining quality control. As firms expand, they may find it harder to coordinate operations effectively, leading to higher operational costs and potentially a decrease in productivity.

When examining the aspects of larger firms, inefficiencies may arise from bureaucratic layers, longer decision-making processes, and difficulties in managing a larger workforce. Therefore, when a business exceeds its optimal size, it may end up paying more for each unit produced, contrasting with the concept of economies of scale, where costs decrease as production scales up. This distinction highlights why increased costs per unit due to larger firm size is central to understanding diseconomies of scale.