Economics, 3rd Edition

diseconomies of scale

.

diseconomies of scale

 the property whereby long-run average total cost rises as the quantity of output increases

Note that when we talk about economies of scale we are referring to unit costs (or average costs) – 

clearly if a firm increases its capacity by building a new factory and then hiring more capital and labour to 

work in the factory, total costs are going to rise but if the relative increase in output is greater than the rela-

tive increase in total costs as a result then the unit or average cost will fall. Note that here we are referring 

to the concept of scale as the proportionate increase of all factor inputs and the resultant relative increase 

in output. Consideration has to be taken of the price of factor inputs. In our example, the price of labour 

is 

€60 per unit and the price of capital €100 per unit. If these prices remain constant then a 50 per cent 

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148  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

increase in all factor inputs would increase total cost by 50 per cent. If this 50 per cent increase in inputs 

leads to a 75 per cent increase in output then average costs will fall.

Returns to scale can be found by using the formula:

Returns to scale

=

%

Δ quantity of output

%

Δ in the quantity of all factor inputs