Difference Between Economies of Scale and Diseconomies of Scale

Difference Between Economies of Scale and Diseconomies of Scale


Economies Of Scale

As Output Rises And The Scale Of The Firm Increases, Costs Per Unit Of Output

  • Not All Firms Or Industries Have A U-Shaped Long Run Cost Curve.
  • Economies Or Diseconomies Do Not Come About Because Of A Law Like The Law Of DMR.
  • Thus, Some Industries May Have Only Economies, Others Only Diseconomies And Others Constant Returns To Scale.

Two Types Of Economics Scale

External Economies

Are Those Which Are Available To All The Firms In An Industry, E>G., The Construction Of A Railway Line In A Certain Region Which Would Reduce Transport Cost For All The Firms. 

Internal Economies

Arise From The Expansion Of The Size Of A Particular Firm.A Small Establishment Cannot Afford To Use Such Machines And Processes, For Their Use Would Bring A Saving Only When They Are Used Intensively.

Marketing Economies

A Large Firm Can Secure Economies In Its Purchasing And Sales.  It Can Purchase Its Requirements In Bulk And Thereby Get Better Terms.

Economies Of Risk-Spreading

The Larger The Size Of The Business The Greater Is The Scope For Spreading Risks Through Diversification.

  1. Diversification Of Output
  2. Diversification Of Markets.



To Distinguish Between Internal And External Economies, One Can Say That The Former Result Due To The Firm’s Own Expansion While The Latter Arise Not Due To Its Own Expansion But Due To Expansion Of Industry.

Diseconomies Of Scale

Diseconomies Of Scale Occur When A Business Grows So Large That The Costs Per Unit Increase. As Output Rises, It Is Not Inevitable That Unit Costs Will Fall. Sometimes A Business Can Get Too Big! Diseconomies Of Scale Occur For Several Reasons, But All As A Result Of The Difficulties Of Managing A Larger Workforce.

 But Economies Of Increasing Size Do Not Continue Indefinitely.  After A Certain Point, Any Further Expansion Of Size Leads To Diseconomies Of Scale.



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