DEFINITION of 'External Diseconomies Of Scale'

External diseconomies of scale are the result of outside factors beyond the control of a company increasing its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production.

BREAKING DOWN 'External Diseconomies Of Scale'

Factors of production are the inputs that firms use in order to produce output. The inputs include land, labor and capital. Some economists include entrepreneurship as well.

For example, assume there is a manufacturer of 'widgets' in a given city. If the average wage level increases across all other markets as a result to an increased demand for labor, then to entice workers to produce "widgets", the manufacturer must pay more in wages, which will raise the total costs.

Causes Behind External Economies of Scale

The introduction of additional competitive rivals in a given industry is sometimes pointed to as a key factor in external diseconomies of scale. As more companies compete for the same workforce, the salaries each company offers may need to increase in order to attract the needed personnel.

This differs from internal influences, such the size of the company growing so large that must raise prices to accommodate its elevated infrastructure and logistics costs.

Certain industries that rely on access to materials that become more difficult to come by may face external diseconomies of scale. For instance, as more and more fossil fuels are expended, petroleum companies may be forced to search for this resource in harder to reach locations. This can include drilling deeper and deeper underground and exploring the use of alternative fuel sources, all of which can require a considerable outlay of financing. That can include additional work hours, more equipment, and dealing with securing access to new areas where oil may be found. The harder it becomes to find this resource, the higher the costs will rise in order to tap into it.

An industry-wide change in primary materials used in the production of goods and services can also lead to such diseconomies of scale. The electronics industry, for example, adopted new formats and components with the introduction of flat screen, high definition televisions. The move away from cathode ray tube hardware meant establishing new manufacturing techniques in order to remain competitive. Prices for the first flat screen, high definition televisions were higher than their dated counterparts not only because the older technology was being rendered obsolete. The time and cost to produce these new models carried higher expenses that the product makers were compelled to pass along to their customers.

.

RELATED TERMS
  1. Law Of Diminishing Marginal Productivity

    The law of diminishing marginal productivity is an economic principle ...
  2. Externality

    An externality is a consequence experienced by unrelated third ...
  3. Production Externality

    Production externality refers to a side effect from an industrial ...
  4. External Debt

    External debt is a form of financing borrowed by a country from ...
  5. Minimum Efficient Scale

    The minimum efficient scale is the least amount of production ...
  6. True Cost Economics

    True cost economics is an economic model that seeks to include ...
Related Articles
  1. Insights

    Explaining Minimum Efficient Scale

    Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.
  2. Small Business

    Understanding Externality

    An externality is a consequence of an economic activity that is experienced by unrelated third parties.
  3. Investing

    Key Financial Ratios for Manufacturing Companies

    An investor can utilize these financial ratios to determine whether a manufacturing company is efficient, profitable and a good long-term investment option.
  4. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
  5. Investing

    Buying Stocks When the Price Goes Down: Big Mistake?

    Averaging down is a trumpeted strategy that has merit, but can amount to throwing money away when used carelessly.
  6. Insights

    Will You See Higher Wages In 2015?

    It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
RELATED FAQS
  1. What are some examples of economies of scale?

    Take a look at different examples of economies of scale, including how marginal costs can be reduced through external and ... Read Answer >>
  2. How do property rights affect externalities and market failure?

    Most economic externalities can be efficiently solved through a system of private property rights, where costs and benefits ... Read Answer >>
  3. What would happen to a company's external fund requirements if it reduces the payout ...

    In short, the stronger the company's internal cash flow, and in turn cash position, the less the need to draw on an external ... Read Answer >>
  4. What's the difference between diminishing marginal returns and returns to scale?

    Understand the main differences between the law of diminishing marginal returns and the concept of returns to scale through ... Read Answer >>
  5. What's the difference between production cost and manufacturing cost?

    Learn more about fixed and variable expenses incurred by businesses. Find out how production and manufacturing costs impact ... Read Answer >>
  6. How is absorption costing treated under GAAP?

    Read about the required use of the absorption costing method for all external reports under generally accepted accounting ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center