When Simple Semiconductors was operating at the minimum efficient scale of 10,000-12,000 units per month, the firm's cost per unit was $45. However, when the output level was increased beyond 12,000 units, the cost per unit increased to $47. This increase was attributed to the wear-and-tear of the machinery, and complexities of managing and coordinating. What is this phenomenon known as?

Question

Quizplus · Accepted Answer

The phenomenon seen in this scenario is referred to as diseconomies of scale. Diseconomies of scale can be described as increases in cost per unit when output increases. As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. Large firms tend to become overly bureaucratic, with too many layers of hierarchy. They grow inflexible and slow in decision making.

When Simple Semiconductors Was Operating at the Minimum Efficient Scale