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The concept of diseconomies of scale is the opposite of economies of scale. It occurs when economies of scale become dysfunctional for a firm. [1] In business, diseconomies of scale [2] are the features that lead to an increase in average costs as a business grows beyond a certain size.
There is a distinction between two types of economies of scale: internal and external. An industry that exhibits an internal economy of scale is one where the costs of production fall when the number of firms in the industry drops, but the remaining firms increase their production to match previous levels.
The distinction between pecuniary and technological externalities was originally introduced by Jacob Viner, who did not use the term externalities explicitly but distinguished between economies (positive externalities) and diseconomies (negative externalities). [1] Under complete markets, pecuniary externalities offset each other. For example ...
If only diseconomies of scale existed, then the long-run average cost-minimizing firm size would be one worker, producing the minimal possible level of output. However, economies of scale also apply, which state that large firms can have lower per-unit costs due to buying at bulk discounts (components, insurance, real estate, advertising, etc.) and can also limit competition by buying out ...
A long-run average cost curve is typically downward sloping at relatively low levels of output, and upward or downward sloping at relatively high levels of output. Most commonly, the long-run average cost curve is U-shaped, by definition reflecting economies of scale where negatively sloped and diseconomies of scale where positively sloped.
In economics, the concept of returns to scale arises in the context of a firm's production function.It explains the long-run linkage of increase in output (production) relative to associated increases in the inputs (factors of production).
The tension between economies and diseconomies allows cities to grow but keeps them from becoming too large. At the foundational level, proximity—especially to other facilities and suppliers—is a driving force behind economic growth and is one explanation for why agglomeration effects are so evident in major urban centers.
If Y is a separable production set with a production value function f p, then (positive) economies of scale are present if f p (λx) > λf p (x) for all λ > 1 and f p (λx) < λf p (x) for all λ < 1. The opposite condition may be referred to as negative economies (or diseconomies) of scale.