What are diseconomies of scale?

Diseconomies of scale refer to the situation where an increase in a firm's production scale leads to a rise in the long run average costs per unit. This phenomenon typically occurs when a company grows so large that it becomes inefficient. As firms expand, they might face challenges such as increased complexity in management, communication failures, or logistical issues, which can cause per-unit costs to rise instead of fall as expected.

In this context, as production increases, the firm's management may become more difficult and less effective, potentially leading to inefficiencies. This understanding is crucial because it highlights the potential limitations and pitfalls of scaling up production without addressing the accompanying operational challenges. Having a clear grasp of this concept helps in recognizing when growth might not yield the anticipated economic benefits.