Diseconomies of scale occur when a company or organization grows so large that the costs per unit increase, rather than decrease. This phenomenon can arise due to several factors, including inefficient management, communication breakdowns, and overly complex processes. As a firm expands, it may face challenges such as decreased employee morale, increased bureaucracy, and difficulties in maintaining quality control, all of which can lead to higher average costs. Mathematically, this can be represented as follows:
When total costs rise faster than output increases, the average cost per unit increases, demonstrating diseconomies of scale. It is crucial for businesses to identify the tipping point where growth starts to lead to increased costs, as this can significantly impact profitability and competitiveness.
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