Which concept describes increasing average costs as a firm expands due to coordination problems?

Which concept describes increasing average costs as a firm expands due to coordination problems?

• A. diversification
• B. economies of scale
• C. diseconomies of scale
• D. barriers to entry

Answer: (C)

Rising average costs as a firm grows because coordinating a larger organization becomes harder is the idea of diseconomies of scale. As a business expands, managing more departments, layers of management, and geographical spread makes communication slower and more complex, often leading to duplicated functions and higher administrative costs. These inefficiencies push up the cost per unit even as output increases. By contrast, economies of scale describe costs falling as output rises due to spreading fixed costs, bulk purchasing, or greater specialization. Diversification is about spreading risk across different products or markets, not about how costs change with scale. Barriers to entry are external obstacles facing new entrants, not about a firm's internal cost behavior as it grows. So the concept that matches increasing average costs with expansion due to coordination problems is diseconomies of scale.

Rising average costs as a firm grows because coordinating a larger organization becomes harder is the idea of diseconomies of scale. As a business expands, managing more departments, layers of management, and geographical spread makes communication slower and more complex, often leading to duplicated functions and higher administrative costs. These inefficiencies push up the cost per unit even as output increases. By contrast, economies of scale describe costs falling as output rises due to spreading fixed costs, bulk purchasing, or greater specialization. Diversification is about spreading risk across different products or markets, not about how costs change with scale. Barriers to entry are external obstacles facing new entrants, not about a firm's internal cost behavior as it grows. So the concept that matches increasing average costs with expansion due to coordination problems is diseconomies of scale.