These are the economic disadvantages that accrue to a firm due to large scale production or due to external relationships with other firms. Diseconomies of scale are also classified into internal diseconomies and external diseconomies.

Internal diseconomies of scale.

These arise when the firm's average cost of production increases due to its expansion beyond an optimum level( size). They include:

Managerial diseconomies when a firm grows beyond a certain size, its management becomes complicated Co-ordination, control and decision making become difficult. All these result into poor planning, inefficiently and increasing cost of production.

Financial diseconomies -As a firm expands its scale of production, it becomes difficult to get enough funds to maintain it. Its costs of production increase as interest on borrowed funds increases.

Marketing diseconomies - Advertising diseconomies set in as the ever expanding firm is forced to advertise heavily in order to maintain its market share. The problem of lack of enough market sets in due to over production all of which increase the firm's cost of production

Technical diseconomies - when the firm's size grows beyond a certain level, it becomes increasingly expensive to service and maintain some delicate equipment and machinery .

High input costs- As the production needs of a firm increase, the firm requires more inputs. Increased demand for these may lead to increased input prices. In the same way, workers' associations may demand higher wages for labour hence increasing average labour costs.

Low moral of workers-large firms employ large numbers of people and may sometimes suffer from low morals. Absenteeism rates, lack of punctuality and loss of job interest increase hindering growth of worker productivity and increasing the firm's per unit costs.

Risk diseconomies- Large firms with large physical assets , output reserves and large numbers of workers face high risks of huge losses. The losses could result from fire outbreaks, workers' strikes etc..

External diseconomies of scale.

These are the economic disadvantages faced by all firms in the industry: In other words, these are diseconomies of localization of firms. It is the increase in average cost of production of a firm as a result of over expansion of the industry as a whole. As a result of the industry's over expansion, the following may lead to increase in average cost of production.

land rent will be high because of increased competition due to concentration of many firms in a limited area.

Increased competition would also lead to housing shortages, rising cost of living and development of slums.

Transport would increase followed by traffic congession in the area of industrial localisation.

A strain on available infrastructure would lead to high costs of maintaining roads, schools, sanitation etc..

Increased pollution and other social costs like poor sanitation will result and firms have to incur higher costs on fighting pollution and improving the poor sanitation.

High production by all firms may lead to a problem of inadequate market. Firms will incur high costs of transport to distant markets and other distribution costs.

Figure 2.21 Economies and diseconomies of scale.

By producing output Q1, The firm incurs an average cost ( AC1). When it increases its output to Q₂, the average cost falls to C₂ and further increase in output results into a fall in average cost to C3. ( at point x). Thus the section of the AC curve between A and X shows economies of scale (falling average costs)

Point X is known as the optimum point; optimum point therefore is the point at which the firm is producing the highest possible output at the lowest cost.

It is important to note that an optimum firm is defined as one which operates (produces) at the lowest possible cost per unit of output.

Beyond point X, a further expansion of the firm (increase in output) leads to increasing costs, hence diseconomies of scale.

The section of the average cost curve X-B represents diseconomies of scale.