Diseconomies of scale refer to the inefficiency seen in firms when they become too large and start incurring greater costs as they expand. Big organizations move from economies of scale to diseconomies of scale after long-run average costs move past their lowest point.
For instance, consider the example of an entrepreneurial start-up. The initial cost incurred by the firm will be higher. As the firm expands, the cost of production is dispersed over an increased number of goods. Thus, effectively it appears as though the average cost is reducing. This is referred to as ‘achieving economies of scale’. These economies of scale are achieved because of factors such as specialisation of labour, incoming of bulk orders, reducing operational costs by spreading them over greater units produced.
