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Diseconomies of Scale

Diseconomies of scale refer to the negative effects (decreasing returns) that can occur when a company grows too large and becomes inefficient. These negative effects can result in higher long run average costs (LRAC) and reduced profitability.

Some examples of diseconomies of scale include:

  1. Communication breakdowns: In large companies, it can be difficult for information to flow effectively between different departments and levels of the organization. This can lead to delays and inefficiencies in decision-making and can result in higher costs.
  2. Coordination problems: Large companies may have complex supply chains and operations, which can make it difficult to coordinate the activities of different departments and divisions. This can result in inefficiencies and higher costs.
  3. Bureaucracy: As companies grow larger, they may become more bureaucratic, with more layers of management and complex rules and procedures. This can slow down decision-making and make the company less agile and responsive to change.
  4. Talent retention: Large companies may have a harder time retaining top talent due to their size and bureaucracy. This can lead to higher turnover and the need to constantly hire and train new employees, which can be costly.
  5. Resource allocation: In large companies, it can be difficult to allocate resources effectively across different business units or projects. This can result in wasted resources and higher costs.

Diseconomies of scale lead to a rise in long run average cost (LRAC) as a business expands. It takes a business beyond their minimum efficient scale and leads to a loss of productive efficiency.

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