A Level Economics AQA Practice Exam

What is meant by diseconomies of scale?

1. The situation where costs remain constant as output increases

2. When a firm’s long-run average costs rise as output increases

3. When a firm benefits from cost reductions as output increases

4. A reduction in costs due to efficient management

The correct answer is: When a firm’s long-run average costs rise as output increases

Diseconomies of scale refer to the phenomenon that occurs when a firm's long-run average costs increase as it produces more output. This can happen for various reasons, such as increased complexity in managing larger operations, difficulties in communication, and inefficiencies that arise from coordination challenges. As a firm expands, it may face rising per-unit costs due to factors like over-utilization of resources, the necessity of employing more layers of management, and the potential dilution of company culture, which can ultimately lead to inefficiencies. In contrast, the other options describe different economic scenarios. The first option speaks to a situation where costs do not change with output, which is not representative of diseconomies. The third option pertains to economies of scale, where a firm benefits from reduced costs as output increases, opposite to the concept of diseconomies. The fourth option highlights cost reductions due to efficient management, which again aligns with economies of scale rather than diseconomies. Thus, the definition that correctly captures the essence of diseconomies of scale is that it refers specifically to the rise in long-run average costs as output increases.